##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-K





Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the calendar year ended December 31, 2007

Commission File Number 1-9927

LOGO





COMPREHENSIVE CARE CORPORATION

(Exact name of Registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 95-2594724                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

3405 W. Dr. Martin Luther King, Jr. Blvd, Suite 101

Tampa, Florida 33607

(Address of
principal executive offices, zip code)

(813) 288-4808

(Registrants telephone number, including area code)





SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:

Common Stock, Par Value
$0.01 per share

71/2% Convertible Subordinated Debentures due 2010

(Title of class)





Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

Indicate by check mark whether
the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated
Filer   ̈    Accelerated Filer   ̈    Non-Accelerated Filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 29, 2007 was approximately $5,417,000 based on the closing price of $1.12 of the common stock on June 29, 2007, as
reported on the Over-The-Counter Bulletin Board. This amount excludes approximately 2.9 million shares of common stock held by officers, directors, and persons owning 5% or more of our outstanding common stock. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

On March 11, 2008, the Registrant had 7,702,766 shares of
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.









---

##### Table of Contents

TABLE OF CONTENTS



|             |  |          |  |                                                                                                              |  |   
|------------ |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I       |  | 3       
|             |  | Item 1.  |  | Business                                                                                                     |  | 3 
|             |  | Item 1A. |  | Risk Factors                                                                                                 |  | 9 
|             |  | Item 2.  |  | Properties                                                                                                   |  | 16
|             |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 16
|             | 
|PART II      |  | 17      
|             |  | Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17
|             |  | Item 6.  |  | Selected Financial Data                                                                                      |  | 18
|             |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 19
|             |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 26
|             |  | Item 8.  |  | Consolidated Financial Statements and Supplementary Data                                                     |  | 27
|             |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 49
|             | 
|PART III     |  | 50      
|             |  | Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 50
|             |  | Item 11. |  | Executive Compensation                                                                                       |  | 53
|             |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 63
|             |  | Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 65
|             |  | Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 66
|             | 
|PART IV      |  | 67      
|             |  | Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 67
|             | 
|SIGNATURES   |  | 69      
|             | 
|EXHIBIT 14.1 |  |         
|EXHIBIT 21.1 |  |         
|EXHIBIT 23.1 |  |         
|EXHIBIT 31.1 |  |         
|EXHIBIT 31.2 |  |         
|EXHIBIT 32.1 |  |         
|EXHIBIT 32.2 |  |         



2



---

##### Table of Contents

PART I



|ITEM1. | BUSINESS
|------ | --------

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included in this annual report and in our other reports, Securities and Exchange Commission (SEC) filings, statements, and
presentations is forward looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning our anticipated operating results, financial resources, increases in revenues,
increased profitability, interest expense, growth and expansion, and the ability to obtain new behavioral healthcare contracts. Such forward-looking information involves important risks and uncertainties that could significantly affect actual
results and cause them to differ materially from expectations expressed herein and in our other reports, SEC filings, statements, and presentations. These risks and uncertainties include the effect of governmental regulation, competitive market
conditions, varying trends in member utilization, our ability to manage healthcare operating expenses, the profitability of our capitated contracts, cost of care, seasonality, our ability to renegotiate or extend expiring customer contracts, the
risk that any definitive agreements or additional business will result from letters of intent entered into by us, and other risks detailed from time to time in our SEC reports.

OVERVIEW

We are a Delaware
corporation organized in 1969. Unless the context otherwise requires, all references to us include our wholly owned operating subsidiary, Comprehensive Behavioral Care, Inc.(CBC) and subsidiaries.

Primarily through CBC, we provide managed care services in the behavioral health
and psychiatric fields, which is our only operating segment. We coordinate and manage the delivery of a continuum of psychiatric and substance abuse services to:



| |  |  | Commercial members
| | - |  | ------------------



| |  |  | Medicare members
| | - |  | ----------------



| |  |  | Medicaid members
| | - |  | ----------------



| |  |  | Childrens Health Insurance Program (CHIP) members
| | - |  | --------------------------------------------------

on behalf of:



| |  |  | employers
| | - |  | ---------



| |  |  | health plans
| | - |  | ------------



| |  |  | government organizations
| | - |  | ------------------------



| |  |  | third-party claims administrators
| | - |  | ---------------------------------



| |  |  | commercial purchasers
| | - |  | ---------------------



| |  |  | other group purchasers of behavioral healthcare services.
| | - |  | ---------------------------------------------------------

Our customer base includes both private and governmental entities. We provide services primarily by a contracted network of providers that includes:



| |  |  | psychiatrists
| | - |  | -------------



| |  |  | psychologists
| | - |  | -------------



| |  |  | therapists
| | - |  | ----------



| |  |  | other licensed healthcare professionals
| | - |  | ---------------------------------------



| |  |  | psychiatric hospitals
| | - |  | ---------------------



| |  |  | general medical facilities with psychiatric beds
| | - |  | ------------------------------------------------



| |  |  | residential treatment centers
| | - |  | -----------------------------



| |  |  | other treatment facilities.
| | - |  | ---------------------------

The
services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), and inpatient and crises
intervention services. We do not directly provide treatment or own any provider of treatment services.



3



---

##### Table of Contents

We typically enter into contracts with our clients on an annual basis to provide managed behavioral
healthcare and substance abuse services to our clients members. Our arrangements with our clients fall into two broad categories:



| |  |  | capitation arrangements, where our clients pay us a fixed fee per member
| | - |  | ------------------------------------------------------------------------



| |  |  | fee-for-service and administrative service arrangements where we manage behavioral healthcare programs or perform various managed care services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Under capitation arrangements, the number of covered members reported by our clients determines the amount of premiums
we receive, which is independent of the cost of services rendered to members. The amount of premiums we receive for each member is fixed at the beginning of the contract term. These premiums may be subsequently adjusted, up or down, generally at the
commencement of each renewal period.

The following table sets forth our operating revenue and covered lives, segregated by category, for
the year ended December 31, 2007, the seven months ended December 31, 2006, and for the fiscal years ended May 31, 2006, 2005, and 2004:



|                      |      |                        |            |      |                               |   |           |                           |  |      |            |   |      |   |            |   |  |   |            |  
|--------------------- | ---- | ---------------------- | ---------- | ---- | ----------------------------- | - | --------- | ------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | - |  | - | ---------- | -
|                      |      | Year EndedDecember 31, |            |      | Seven MonthsEndedDecember 31, |   |           | Fiscal Year Ended May 31, | 
|                      | 2007 |                        |            | 2006 |                               |   | 2006      |                           |  | 2005 |            |   | 2004 |  
|Capitated revenue     |      | $                      | 36,295,000 |      |                               | $ | 9,829,000 |                           |  | $    | 23,044,000 |   |      | $ | 22,062,000 |   |  | $ | 23,580,000 |  
|% of total revenues   |      |                        | 97.0       | %    |                               |   | 95.3      | %                         |  |      | 96.2       | % |      |   | 90.2       | % |  |   | 85.5       | %
|Member lives          |      |                        | 933,000    |      |                               |   | 664,000   |                           |  |      | 654,000    |   |      |   | 681,000    |   |  |   | 700,000    |  
|                      |      |                        |            |      |                              
|Non-capitated revenue |      | $                      | 1,105,000  |      |                               | $ | 486,000   |                           |  | $    | 912,000    |   |      | $ | 2,411,000  |   |  | $ | 4,003,000  |  
|% of total revenues   |      |                        | 3.0        | %    |                               |   | 4.7       | %                         |  |      | 3.8        | % |      |   | 9.8        | % |  |   | 14.5       | %
|Member lives          |      |                        | 92,000     |      |                               |   | 99,000    |                           |  |      | 86,000     |   |      |   | 245,000    |   |  |   | 370,000    |  

Over the last several years we have experienced a trend with our clients to contract for services
more on a capitated basis than on a non-capitated basis. In addition, several of our large clients have determined to establish their own behavioral health units.

Our largest expense is the cost of behavioral health services that we provide, which is based primarily on our arrangements with healthcare providers. Since we are subject to increases in healthcare operating expenses
based on an increase in the number and frequency of our members seeking behavioral care services, our profitability depends on our ability to predict and effectively manage healthcare operating expenses in relation to the fixed premiums we receive
under capitation arrangements. Providing services on a capitation basis exposes us to the risk that our contracts may ultimately be unprofitable if we are unable to anticipate or control healthcare costs. Estimation of healthcare operating expense
is our most significant critical accounting estimate. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Estimates.

We manage programs through which services are provided to recipients in fifteen states. Our programs and services include:



| |  |  | fully integrated capitated behavioral healthcare services
| | - |  | ---------------------------------------------------------



| |  |  | case management/utilization review services
| | - |  | -------------------------------------------



| |  |  | administrative services management
| | - |  | ----------------------------------



| |  |  | provider sponsored health plan development
| | - |  | ------------------------------------------



| |  |  | preferred provider network development
| | - |  | --------------------------------------



| |  |  | management and physician advisor reviews
| | - |  | ----------------------------------------



| |  |  | overall care management services
| | - |  | --------------------------------



| |  |  | Employee Assistance Programs (EAPs)
| | - |  | -------------------------------------

We also provide prior and concurrent authorization for physician-prescribed psychotropic medications for a Medicaid health maintenance organization (HMO) in Michigan. Members are generally directed to us
by their employer, health plan, or physician and receive an initial authorization for an assessment. Based upon the physicians initial assessment, a treatment plan is established for the member.



4



---

##### Table of Contents

Our objective is to provide easily accessible, high quality behavioral healthcare services and products
and to manage costs through measures such as the monitoring of hospital inpatient admissions and the review of authorizations for various types of outpatient therapy. Our goal is to combine access to quality behavioral healthcare services with
effective management controls in order to ensure the most cost-effective use of healthcare resources.

RECENT DEVELOPMENTS

On January 4, 2008 we announced the appointment of John M. Hill as our new President and Chief Executive Officer, replacing Mary Jane
Johnson, who resigned for health reasons effective December 14, 2007.

In January 2008, our Pennsylvania and Maryland Medicare
Advantage health plan client, representing $5.5 million, or 14.7%, of our total revenue during 2007, issued a Request for Proposal (RFP) for management of behavioral healthcare services for its Pennsylvania, Maryland, and Texas regions.
We submitted a bid to retain our current business from this client as well as attempt to contract for the Texas membership. Our client intends to select a finalist in March 2008 with an effective date of July 1, 2008 for a new agreement. We do
not expect to be selected as a finalist and accordingly the majority of the revenues under this contract are expected to end during the third quarter of 2008.

One of our existing commercial health plan clients in Indiana has decided to exit the group health plan business. Beginning January 1, 2008 and throughout the remainder of 2008, this health plan will not be
renewing any of its existing customer contracts, as all of their members are being transitioned to other health plans. This health plan accounted for approximately 5.0%, or $1.9 million, of our revenues for the year ended December 31, 2007.

On August 1, 2007, we began providing behavioral healthcare services to approximately 23,000 Medicare members from an existing client
in Pennsylvania. Such services are estimated to generate between $4.5 and $5.0 million in annual revenues.

On July 19, 2007, we
received from an existing client in Texas a notice of termination which resulted in termination of our contract effective November 30, 2007. This client accounted for 7.6%, or $2.8 million, of our revenues for the year ended December 31,
2007 and had been a customer since 1998.

On January 12, 2007 Hythiam, Inc. acquired all of the membership interests of Woodcliff
Healthcare Investment Partners, LLC (Woodcliff), which is now a wholly owned subsidiary of Hythiam. Through Woodcliff, Hythiam owns 1,739,130 shares of our common stock and 14,400 shares of our Series A Convertible Preferred Stock. The Preferred
Stock is convertible into 4,235,328 shares of our common stock, and assuming conversion, Hythiam has the ability to control 5,974,458 shares or 50.05% of our common stock based upon shares outstanding at March 11, 2008.

On May 21, 2007, our Board of Directors approved a change in our fiscal year end from May 31 to December 31, effective December 31,
2006, to align our fiscal year end with that of Hythiam to obtain reporting efficiencies and cost reductions. In addition, a calendar year end coincides with that of our major Indiana client, which accounted for approximately 40.2% of our revenues
during 2007. The seven months ended December 31, 2006 was our transition period for financial reporting purposes.

SOURCES
OF REVENUE

We provide managed behavioral healthcare and substance abuse services to recipients, primarily
through subcontracts with HMOs who have historically carved out these functions to managed behavioral healthcare organizations like us. We generally receive a negotiated amount on a per member, per month or capitated basis in exchange for providing
these services. We then contract directly with behavioral healthcare providers who receive a pre-determined, fee-for-service rate or case rate. Our behavioral healthcare providers include:



| |  |  | psychiatrists
| | - |  | -------------



| |  |  | psychologists
| | - |  | -------------



| |  |  | therapists
| | - |  | ----------



| |  |  | other licensed healthcare professionals
| | - |  | ---------------------------------------



| |  |  | hospitals.
| | - |  | ----------



5



---

##### Table of Contents

As of December 31, 2007, we had approximately 3,500 behavioral healthcare practitioners in our
network who are primarily located in the seven states in which we have principal contracts:



| |  |  | Indiana
| | - |  | -------



| |  |  | Florida
| | - |  | -------



| |  |  | Michigan
| | - |  | --------



| |  |  | Texas
| | - |  | -----



| |  |  | Pennsylvania
| | - |  | ------------



| |  |  | Maryland
| | - |  | --------



| |  |  | California.
| | - |  | -----------

Under such full-risk
capitation arrangements, our profit is a function of utilization and the amount of claims payments made to our network providers. We perform periodic reviews of our current client contracts to determine profitability. In the event a contract is not
profitable, we may seek to revise the terms of the contract or to terminate the agreement in accordance with the specific contract terms.

For the year ended December 31, 2007, we provided services under capitated arrangements for commercial, Medicaid, and CHIP patients in Texas; commercial, Medicaid, and Medicare patients in Florida; commercial patients in Georgia,
Alabama, and Indiana; Medicare patients in the District of Columbia, Maryland, Connecticut and Pennsylvania; and Medicaid patients in California, Michigan, and Indiana. Our Medicare, Medicaid and CHIP contracts are subject to agreements with our HMO
clients whose contracts with the various governmental agencies may be subject to renegotiation at the election of the specific agency.

Over seventy-five percent of our operating revenue is currently concentrated, and has been concentrated in past fiscal periods, in contracts with six to eight health plans to provide behavioral healthcare services under commercial,
Medicare, Medicaid, and CHIP plans. The terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party. The loss of one or more of these clients, without
replacement by new business, would negatively affect our financial condition.

GROWTH STRATEGY

Our objective is to expand our presence in both existing and new managed behavioral healthcare markets by enhancing our product offerings and identifying
new business development partners. We have expanded our disease management approach to include behavioral health pharmacy management, integration of behavioral health with medical care that targets primary care physician support, substance abuse
disease management with cutting edge medical technology, and other chronic disease coordination programs.

We provide our core product,
carve-out behavioral healthcare management, to health plans, government entities, employers and other entities. In addition, the Medicare market is growing rapidly with new Medicare Advantage Plans being approved by the Centers for Medicare and
Medicaid Services (CMS). Persons over the age of 65 and younger persons who are deemed disabled are eligible to receive Medicare benefits. The shifting demographics of the U.S. population signal increasing Medicare enrollment as the baby boom
generation ages. According to the U.S. government, Medicare expenditures are projected to double over the next decade to a cost of approximately $863 billion in the year 2016. Mental health expertise is critical to successful management of
healthcare costs, and of particular importance to managing the care of Medicare populations.

We are continuing to work with Hythiam to provide the Prometa® Treatment Programs for alcoholism and dependence to cocaine and methamphetamine for our Substance Abuse product
offering and to develop disease management programs.

PROVIDER NETWORK

Our managed behavioral healthcare services are provided by contracted providers, including behavioral healthcare professionals and facilities. Our
behavioral healthcare professionals include a variety of specialized behavioral healthcare personnel, such as:



| |  |  | psychiatrists
| | - |  | -------------



| |  |  | psychologists
| | - |  | -------------



| |  |  | therapists
| | - |  | ----------



6



---

##### Table of Contents

| |  |  | licensed clinical social workers
| | - |  | --------------------------------



| |  |  | substance abuse counselors
| | - |  | --------------------------



| |  |  | other licensed healthcare professionals.
| | - |  | ----------------------------------------

The facilities we provide our services to include:



| |  |  | psychiatric hospitals
| | - |  | ---------------------



| |  |  | general medical facilities with psychiatric beds
| | - |  | ------------------------------------------------



| |  |  | residential treatment facilities
| | - |  | --------------------------------



| |  |  | other treatment facilities.
| | - |  | ---------------------------

Outpatient providers include both individual practitioners as well as individuals who are members of group practices or other licensed centers or programs. Outpatient providers typically execute contracts with us under which they are
generally paid on a fee-for-service basis.

Our provider network also includes contractual arrangements with intensive outpatient
facilities, partial hospitalization facilities, community health centers and other community-based facilities. Our contracts with facilities are on a per diem or fee-for-service basis and, in some cases, on a case rate basis, whereby a
fixed amount is paid irrespective of the amount of services provided.

COMPETITION

The behavioral healthcare industry is very competitive and provides products and services that are price sensitive. We believe that there are
approximately 150 managed behavioral healthcare organizations (MBHOs) providing services for an estimated 227 million covered lives in the United States. Competitors include both freestanding MBHOs as well as HMOs with internal
behavioral health units or subsidiaries. Many of these competitors have revenues, financial resources, and membership substantially larger than ours. The extent of competition results in significant pricing pressures which limits our revenue growth.
Accordingly, we expect our future growth to come mainly from additional contracts in different segments.

SEASONALITY OF
BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May, and
consistently low utilization by members during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits
during the June through August period and a negative impact on our gross margins and operating profits during the months of March through May.

GOVERNMENT REGULATION

We are subject to extensive and evolving state and federal regulations
relating to the nations mental health system, as well as changes in Medicaid and Medicare reimbursement that could have an effect on our profitability. These regulations range from licensure and compliance with regulations related to insurance
companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably among states. As a result, we may be subject to the specific regulatory
approach adopted by each state for regulation of managed care companies and for providers of behavioral healthcare treatment services. We hold licenses or certificates to perform utilization review and/or third party administrator (TPA)
services in:



| |  |  | Connecticut
| | - |  | -----------



| |  |  | Florida
| | - |  | -------



| |  |  | Georgia
| | - |  | -------



| |  |  | Indiana
| | - |  | -------



| |  |  | Maryland
| | - |  | --------



| |  |  | Michigan
| | - |  | --------



| |  |  | Pennsylvania
| | - |  | ------------



| |  |  | Texas.
| | - |  | ------



7



---

##### Table of Contents

Some of the services provided by our managed behavioral healthcare subsidiaries may be subject to such
licensing requirements in other states. There can be no assurance that additional utilization review or TPA licenses will not be required or, if required, that we will qualify to obtain or renew such licenses. In many states, entities that assume
risk under contract with licensed insurance companies or health plans that retain ultimate financial responsibility have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure
as either an insurer or HMO in certain states. If the regulatory positions of these states were to change, our business could be materially affected until such time as we meet the regulatory requirements. We cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.

As of December 31, 2007, we managed approximately 913,000 lives in connection with behavioral and substance abuse services covered through Medicaid
and CHIP programs in Texas, Medicare and Medicaid in Florida, Medicaid in California, Michigan and Indiana, and Medicare in Maryland and Pennsylvania. Any changes in Medicare, Medicaid or CHIP funding would ultimately affect our reimbursement and
overall profitability.

We are subject to the requirements of the Health Insurance Portability and Accountability Act of 1996
(HIPAA). One of the purposes of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and, also, to
protect the security and privacy of protected health information. Entities subject to HIPAA include some healthcare providers and all healthcare plans.

ACCREDITATION

The National Committee on Quality Assurance (NCQA) provides information about the quality
of national managed care plans to enable consumers to evaluate health plan performance. To develop standards that effectively evaluate the structure and function of medical and quality management systems in managed care organizations, NCQA has
developed an extensive review and development process in conjunction with the managed care industry, healthcare purchasers, state regulators, and consumers. The Standards for Accreditation of MBHOs used by NCQA reviewers to evaluate an MBHO address
the following areas: quality improvement; utilization management; credentialing; members rights and responsibilities; and preventative care. These standards validate that an MBHO is founded on principles of quality and is continuously
improving the clinical care and services it provides. NCQA utilizes the Health Plan Employer Data and Information Set (HEDIS), which is a core set of performance measurements developed to respond to complex but clearly defined employer
needs as standards for patient care and customer satisfaction.

In May 2005 we were awarded Full Accreditation by NCQA extending to
July 22, 2008. Full Accreditation is granted for a period of three years to those plans that have, according to the NCQA, excellent programs for continuous quality improvement and that meet NCQAs rigorous standards.

We believe our NCQA accreditation is beneficial to our clients and their members we serve. Additionally, NCQA accreditation is required by several of our
client contracts and is frequently an important consideration to our prospective clients.

MANAGEMENT INFORMATION
SYSTEMS

All of our health plan information technology and systems operate on a single platform. This approach avoids the
costs associated with maintaining multiple systems and improves productivity. The open architecture of the systems gives us the ability to transfer data from other systems thereby facilitating the integration of new health plan business. We use our
information system for claims processing, utilization management, reporting, cost trending, planning, and analysis. The system also supports member and provider service functions, including:



| |  |  | enrollment
| | - |  | ----------



| |  |  | member eligibility verification
| | - |  | -------------------------------



| |  |  | provider rosters
| | - |  | ----------------



| |  |  | claims status inquiries
| | - |  | -----------------------



| |  |  | referrals and authorizations.
| | - |  | -----------------------------



8



---

##### Table of Contents

We have decided to implement significant enhancements to our existing healthcare information
system with recently made available technology from our current vendor to best meet our future information system needs and comply with all HIPAA requirements. These enhancements include advanced software to
facilitate patient case management and provide our healthcare providers with self-serve capabilities through the Internet. We expect all parties involved to benefit from the efficiencies of our improved information systems.

MARKETING AND SALES

Our Marketing and Sales efforts are led by our Chief Development Officer. In addition, we utilize Health Alliance Network for consultation and direct sales to commercial, Medicaid and Medicare prospective clients. We also recently entered
into a sales referral and cooperative marketing relationship with Adaptis, Inc., which offers integrated business process solutions for health payers. We will continue to dedicate necessary resources to expand sales staff and marketing efforts.

Sales strategy focuses on matching our solutions to the needs identified by our potential clients. Sales are highly technical and complex,
involving many stakeholders within an organization. The sales cycle is typically 12-18 months. Sales leads may be generated by our Business Development staff, our operations staff, consultants, cold calls, prior business relationships, or
recommendations from existing clients. We attend trade shows within geographic areas in which we conduct business and reach out to contacts known to us, our consultants and our investors. Proposals in response to RFPs from prospective commercial and
public sector clients are prepared by our sales staff and presented by our Chief Development Officer. In addition, we maintain permanent marketing outreach through our website, www.compcare.com.

ADMINISTRATION AND EMPLOYEES

Our executive and administrative offices are located in Tampa, Florida, where we maintain operations, business development, accounting, reporting and information systems, and provider and member service functions.
Provider management, account management, and certain clinical and utilization management functions are also performed in our Texas and Indiana offices. At December 31, 2007 we employed 92 full-time and 8 part-time employees.

AVAILABLE INFORMATION

Our
stockholder website is www.compcare-shareholders.com. We make available free of charge, through a link to the SEC Internet site, our annual, quarterly, and current reports, and any amendments to these reports, as well as any beneficial ownership
reports of officers and directors filed electronically on Forms 3, 4, and 5. Information contained on our website or linked through our website is not part of this report on Form 10-K. The public may read and copy any materials we file with the SEC
at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be found at http://www.sec.gov.

CODE OF ETHICS

We have adopted a code of ethics applicable to
all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The text of this code of ethics can be found on our website at
www.compcare-shareholders.com. We intend to post notice of any waiver from, or amendment to, any provision of our code of ethics on our website.



|ITEM1A. | RISK FACTORS
|------- | ------------

You should carefully consider and evaluate all of the
information in this report, including the risk factors listed below. Risks and uncertainties in addition to those we describe below, that may not be presently known to us, or that we currently believe are immaterial, may also harm our business and
operations. If any of these risks occurs, our business, results of operations and financial condition could be harmed, the price of our common stock could decline, and future events and circumstances could differ significantly from those anticipated
in the forward-looking statements contained in this report.



9



---

##### Table of Contents

Risks related to our business

We may not be able to accurately predict utilization of our full-risk contracts, which could result in contracts priced at levels insufficient to ensure profitability.

Managed care operations are at risk for costs incurred to provide agreed upon levels of service. Failure to anticipate or control costs could have material, adverse
effects on our business. A very large percentage of our services are provided on a full-risk capitation basis which exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels
require us to provide services at a cost in excess of the capitation rates we receive for the services. The population we began managing in 2007 for our large Indiana client had not been subject to managed care previously and consequently there was
little historical utilization data upon which to base initial pricing. Actual utilization experience has been greater than initial estimates, resulting in higher claim costs and lower profit margins. Failure to manage our costs or achieve
anticipated cost reductions in populations brought under management will have an adverse effect on our financial results.

Because providers are
responsible for claims submission, the timing of which is uncertain, we must estimate the amount of claims incurred but not reported, and actual results may differ materially.

Our costs of care include estimated amounts for claims incurred but not reported (IBNR). The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that we
continually review and adjust, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. Our estimates of IBNR may be inadequate in the future, which would
negatively affect results of operations. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results may differ materially from the estimated amounts reported.

We are subject to fines and penalties being assessed to us by our clients.

Many of our contracts contain provisions stating that if our clients are assessed penalties or fines by a regulatory agency due to our noncompliance with a contractual requirement, we will be responsible for paying
the assessed fine or penalty. Though to date, no material fines have been assessed under such provisions, any future fines would have a negative impact on our results of operations.

A failure of our information systems would significantly impair our ability to serve our customers and manage our business.

An effective and secure information system, available at all times, is vital to our health plan customers and their members. We depend on our computer systems for significant service and management functions, such as providing membership
verification, monitoring utilization, processing provider claims, and providing regulatory data and other client and managerial reports. Although our computer and communications hardware is protected by physical and software safeguards, it is still
vulnerable to computer viruses, fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. We do not have 100% redundancy for all of our computer and telecommunications facilities. A catastrophic
event could have a significant negative effect on our business, results of operations, and financial condition.

We also depend on a third party provider
of application services for our core business application. Any sustained disruption in their services to us would have a material effect on our business.

We are subject to intense competition that may prevent us from gaining new customers or pricing our contracts at levels to achieve sufficient gross margins to ensure profitability.

We are continually pursuing new business. However, many of our competitors are significantly larger and better capitalized than us, and the smaller size and financial
condition of our company has proved a deterrent to some prospective customers. Additionally, we will likely have difficulty in matching the financial resources expended on marketing characteristic of our competitors. As a result, we may not be able
to successfully compete in our industry. Our major competitors include Magellan Health Services, United Behavioral Health, ValueOptions, and APS Healthcare.



10



---

##### Table of Contents

We may require additional funding, and we cannot guarantee that we will find adequate sources of capital in the
future.

We cannot assure you that our existing cash and cash equivalents will be sufficient to fund our business. We expect to obtain these funds from
operating activities and financing activities that may include equity or debt financings, which could dilute stockholder ownership. We cannot provide assurance that additional funding will be available on acceptable terms, if at all. If we are
unable to obtain sufficient additional funds on commercially acceptable terms, we may suffer an adverse impact on our business, financial condition and results of operations.

Our ability to utilize net operating loss carryforwards (NOLs) may be limited.

As of December 31,
2007, we had net operating loss carryforwards (NOLs) of approximately $ 7.7 million for federal income tax purposes that will begin to expire in 2022. These NOLs may be used to offset future taxable income, to the extent we generate
any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporations ability to utilize NOLs if it experiences an ownership
change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event
that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable
long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual
limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.

We underwent such an ownership change in
each of June 2005 and January 2007. Any future ownership changes can impose the application of another Section 382 limitation on our federal NOLs and can reduce the amount of NOLs we can utilize in a year if the fair market value of our stock
were to decline significantly prior to an ownership change. Such an event may have an adverse impact on our anticipated future cash flow.

Our sales
cycle is long, which complicates our ability to predict our growth.

The sales and implementation process for our services is lengthy and requires our
potential clients to commit time and other resources. Our sales cycle is unpredictable and has generally ranged from 12 to 18 months from our initial contact to an executed contract. Accordingly, it may be difficult to replace lost business quickly.

We are dependent on a limited number of customers, and a loss or reduction in business of any one could have a material adverse effect on our working
capital and results of operations.

For the year ended December 31, 2007, we provided behavioral healthcare services to the members of six health
plans under contracts that on a combined basis represented over eighty percent of our operating revenue. The loss of one or more of these clients, unless replaced by new business would negatively affect our financial condition. In the past, we have
experienced the loss of certain major customers, such as our large Connecticut client in 2005 and major Texas clients in 2006 and 2007. We experienced lower operating margins and profitability overall as a result. The terms of each contract are
generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party by giving the requisite written notice.

We are subject to existing clients issuing a RFP for the management of behavioral services currently being managed by us.

Our clients are aware of the highly competitive nature of our industry, and our contracts with them frequently contain provisions allowing termination of the contract by either party without cause with 90 days written notice. Consequently
our clients may request from us and any of our competitors an RFP for behavioral services currently managed by us, putting us at risk of losing a client or clients. For example, during 2007 a major Texas client issued a RFP prior to the end of our
contract. We submitted a proposal but were not chosen to continue services, resulting in a significant reduction in revenue. In addition, certain administrative and overhead costs continued to be incurred past the termination date.



11



---

##### Table of Contents

We are dependent on our executive officers and other key employees.

Our operations are highly dependent on the efforts of our senior executive officers, in particular, our President and Chief Executive Officer, John M. Hill, and our Chief
Financial Officer, Robert J. Landis. Each executive is employed pursuant to an employment agreement or offer letter, the remaining terms of which are three years for Mr. Hill and 17 months for Mr. Landis. The loss of their leadership,
knowledge and experience could negatively impact our operations.

We may be unsuccessful in profitably managing our new Indiana Medicaid contract, and
may not be able to meet specific performance measures that would allow us to receive an increase in the rate.

We may be unsuccessful in managing our
new Indiana Medicaid contract that started January 1, 2007, which provided over 40% of our operating revenues in 2007. Providing services under a new contract for populations at risk that have not been managed before exposes us to the risk it
may be unprofitable. There is a limited historical basis for the actuarial assumptions about the utilization of benefits by members covered under this new managed care behavioral program, and premiums based on these assumptions may be insufficient
to cover the benefits provided and we may be unable to obtain offsetting rate increases. Contract premiums were set based on anticipated significant savings and a high degree of utilization management, which may cause disagreements with providers,
diverting management resources and having an adverse impact on our financial results. Claims expense as a percentage of revenues for this contract amounted to 99.5% for the year ended December 31, 2007.

We are negotiating with this client to obtain a rate increase to offset the higher than expected costs of utilization. We believe that an increase will be granted
effective January 1, 2008, provided we comply with monthly performance measures. Although we believe that we will meet these standards, any failure to comply with one or more of the measurement criteria will reduce our anticipated cash flow and
profitability from this contract.

We may be unsuccessful in obtaining performance bonds or other security that is required by our existing or future
clients, and consequently may lose clients.

Our new Indiana client requires us to maintain a performance bond in the amount of $1,000,000. In addition,
certain of our other customers may require restricted cash accounts or other security with respect to our obligations to pay IBNR claims and claims not yet processed and paid. Due to our small size and financial condition, we may be unable to
provide the security required by our client. This could result in the loss of a client or clients which would negatively affect our financial condition.

We are dependent on our provider network to provide services to our members.

We contract with providers as a means to assure access to
behavioral health services for our members. Some providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher healthcare operating expenses. In addition, certain providers may have
significant market position, which could cause disruption to provider access in a particular geographic area for our members and affect our contractual requirements with our customers of maintaining an adequate network.

We may be unsuccessful in renewing our NCQA accreditation and may lose customers who require such accreditation.

NCQA accreditation is required by several of our client contracts and is an important consideration to our prospective clients. CompCare is periodically evaluated by NCQA
to validate the Companys adherence to NCQA industry-accepted standards covering operational areas such as preventative care, utilization management, credentialing, member rights and responsibilities, and quality improvement. Maintaining these
quality standards and the NCQA accreditation are important considerations of our customers and prospective clients who are evaluated against similar standards. If we are not successful in renewing our NCQA accreditation, this could result in the
loss of a client or clients which would negatively affect our financial condition.



12



---

##### Table of Contents

Claims brought against us may exceed our insurance coverage.

We maintain a program of insurance coverage against a broad range of risks related to our business. As part of this program of insurance, we are subject to certain
deductibles and self-insured retentions. Our insurance may not be sufficient to cover all judgements, settlements or costs relating to future claims, suits or complaints. Upon expiration of our insurance policies, sufficient insurance may not be
available on favorable terms, if at all. If we are unable to secure adequate insurance in the future, this may have a material adverse effect on our profitability and financial condition.

Risks related to our industry

Our existing and potential managed care clients operate in a
highly competitive environment and may be subject to a higher rate of merger, acquisition and regulation than in other industries.

We typically
contract with small to medium sized HMOs which may be adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. Our clients may also determine to manage
the behavioral healthcare benefits in house and, as a result, discontinue contracting with us. Additionally, our clients may be acquired by larger HMOs, in which case there can be no assurance that the acquiring company would renew our
contract.

Many managed care companies, including nine of our existing clients, provide services to groups covered by Medicare, Medicaid and/or CHIP
programs. Such federal and state controlled programs are susceptible to annual changes in reimbursement rates and eligibility requirements that could ultimately affect companies such as CompCare.

As of December 31, 2007, we managed approximately 900,000 lives in connection with behavioral and substance abuse services covered through Medicaid and CHIP
programs in Texas, Medicare and Medicaid in Florida, Medicaid in California, Michigan and Indiana, and Medicare in Maryland and Pennsylvania. Any changes in Medicare, Medicaid and/or CHIP reimbursement could ultimately affect us through contract
bidding and cost structures with the health plans first impacted by such changes. We have limited experience with Medicare members and the various Medicare regulations. If we are unable to adapt to the differing needs of our Medicare members and the
Medicare regulations, we may be unsuccessful in managing this line of business.

Temporary reductions in state funding have previously had a negative
impact on us, and if implemented in the future, could have a material, adverse impact on our operations. In addition, states in which we operate may pass legislation that would reduce our revenue or increase our claims expense through changes in the
reimbursement rates, changes in the benefit covered, or in the number of eligible participants. We may be unable to reduce our costs to a level that would allow us to maintain current gross margins specific to our Medicare, Medicaid and CHIP
programs.

The industry is subject to extensive state and federal regulations, as well as diverse licensure requirements varying by state. Changes in
regulations could affect the profitability of our contracts or our ability to retain clients or to gain new customers.

We are required to hold
licenses or certificates to perform utilization review and/or TPA services in Connecticut, Florida, Georgia, Indiana, Maryland, Michigan, Pennsylvania, and Texas. Additional utilization review or TPA licenses may be required in the future, and we
may not qualify to obtain new licenses or renew existing licenses. In many states, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance
or HMO business. As a result, we have not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, our business could be materially affected until such time as we are able to meet the
regulatory requirements, if at all. Additionally, some states may determine to contract directly with companies such as ours for managed behavioral healthcare services in which case they may also require us to maintain financial reserves or net
worth requirements that we may not be able to meet. Currently, we cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they
are not able to be recouped in future managed care contracts.

Healthcare reform can significantly reduce our revenues and profitability.

The U.S. Congress and certain state legislatures are considering legislation that, among other things, could limit funding to our clients. We cannot
predict the effect of this legislation or other legislation that may be adopted by Congress or by the states. Such legislation, if implemented, could have an adverse effect on us.



13



---

##### Table of Contents

We are subject to federal statutes prohibiting false claims.

The Federal False Claims Act imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and
Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. While we do not directly provide services to beneficiaries of federally funded health programs and, accordingly, do not
submit claims to the federal government, we do provide services to health plans that could become involved with false claims, which could include allegations against us as well.

Failure to adequately comply with HIPAA may result in penalties and loss of revenues.

We are subject to the
requirements of HIPAA. The purpose of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and to protect the
security and privacy of protected health information. We have implemented policies and practices to achieve compliance with HIPAA, and believe we are fully compliant with all HIPAA regulations. However, any lack of compliance with HIPAA regulations
may result in penalties and have a material adverse effect on our ability to retain our customers or to gain new business.

The managed care industry is
subject to class action lawsuits and claims for professional liability that could that could increase our expenditures and have an adverse effect on our profitability and financial condition.

In recent years the managed care industry has been subject to a greater number of lawsuits and claims of professional liability alleging negligence in performing
utilization review and other managed care activities, and in the denial of payment for services. Such incidents may result in professional negligence or other claims against us causing us to incur fees and expend substantial resources in defense of
such actions. Although we maintain professional liability insurance, there can be no assurance that future claims will not have material effect on our profitability and financial position.

Risks related to our common and preferred stock

Our Series A Preferred Shareholder is able
to exercise substantial or decisive influence over our major corporate decisions.

In June 2005, Woodcliff purchased 14,400 shares of our Series A
Convertible Preferred Shares, which have the right to designate a majority of the members of our Board of Directors, and are convertible into 4,235,328 common shares, which when combined on an as-converted basis with 1,739,130 common
shares purchased by Woodcliff in October 2006, results in beneficial ownership of capital stock representing approximately 50.05% of our voting power as of December 31, 2007. Hythiam acquired Woodcliffs interest in January 2007. As a
result, holders of our common stock are subject to the following risks, among others:



| |  |  | Hythiam can exercise decisive influence over the election of directors;
| | - |  | -----------------------------------------------------------------------



| |  |  | Hythiam can exercise decisive influence over major decisions involving us and our assets; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Hythiam may have interests that differ from those of our other stockholders.
| | - |  | ----------------------------------------------------------------------------

Our Series A Preferred Shareholder has significant rights and preferences over the holders of our common stock.

The
holder of our Series A Preferred Shares is entitled to receive dividends when declared by our Board of Directors. The payment of these dividends will take priority over any payment of dividends on our common stock. The holder of our Series A Shares
will have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. The aggregate amount of that senior claim is approximately $3.6 million, which represents the
Series A Preferred shareholder investment in us as of December 31, 2007 and will increase thereafter if such preferred stock accrues dividends and if we issue additional shares of such preferred stock to Hythiam pursuant to the terms of the
Securities Purchase Agreement for the Series A Preferred Shares. There have been no dividends declared or paid by us to our Series A Preferred shareholder.

The holder of our Series A Preferred Shares has other rights and preferences, including the following:



| |  |  | to convert its preferred stock into an increased number of shares of common stock as a result of antidilution adjustments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | to vote together with the holders of our common stock on an as-converted basis on all matters;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | to designate representatives to appoint a majority of our Board of Directors:
| | - |  | -----------------------------------------------------------------------------



14



---

##### Table of Contents

| |  |  | to prevent the creation and issuance of capital stock with rights equal to or superior to those of the Series A Shares;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | prior consent for a sale or merger including a material portion of our assets or business; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | prior consent before entering into any single or series of related transactions exceeding $500,000 or incurring any debt in excess of $200,000.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

These rights and preferences could adversely affect our ability to finance future operations, satisfy capital needs or engage in other
business activities that may be in our interest.

The price of our common stock may be adversely affected by our small public capitalization and
investors may lose money if they invest in our stock.

The size of our public market capitalization is relatively small, and the volume of our shares
that are traded is low. These factors could cause significant fluctuation in the trading of our stock, which may adversely affect the price of our common stock.

We may experience fluctuations in our quarterly operating results, which would cause our stock price to decline.

Our quarterly operating
results have varied in the past and may fluctuate significantly in the future due to seasonal changes in utilization levels, changes in estimates regarding IBNR claims, the timing of implementation of new contracts, and enrollment changes. These
factors may affect our quarterly and annual net revenue, expenses, and profitability in the future, and consequently we may fail to meet market expectations, causing our stock price to decline.

Shares reserved for future issuance upon the conversion of outstanding shares of our Series A Convertible Preferred Stock and upon the exercise of issued options and
warrants will cause dilution to our common stockholders.

As of December 31, 2007, 4,235,328 shares of our common stock were reserved for Series A
Convertible Preferred Stock, 1,476,375 shares for outstanding options and warrants, and 15,051 shares for our convertible debenture. Our stockholders would experience dilution of their investment upon conversion or exercise of these securities.

Our stock is a penny stock which makes it more difficult for us to raise needed funds, and for our stockholders to sell their shares.

The SEC has adopted regulations which generally define penny stock to be an equity security that has a market price of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently approximately $0.60 per share, which is substantially less than the $5.00 per share threshold. This
designation requires any broker or dealer selling these securities to disclose specified information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the
securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of stockholders to sell their shares. In addition, since our common stock is currently not traded on any stock exchange, but
instead is only quoted on the Over-The-Counter Bulletin Board, stockholders may find it difficult to obtain accurate quotations for our common stock and may experience a lack of buyers to purchase our shares or a lack of market makers to support the
stock price.

There may be ongoing legal challenges to our relationship with Hythiam, which could adversely affect our results of operations.

On May 25, 2007, we entered into a Termination Agreement with Hythiam terminating the proposed merger with Hythiam. Two shareholder class action
lawsuits challenging the merger have been dismissed, but plaintiffs requests for attorney fees remain pending. There are potential legal and economic risks associated with terminating the merger agreement and continuing with our ongoing
relationship with Hythiam, including challenges from public minority shareholders concerning the procedural and financial fairness of our existing agreements, and any future agreements or arrangement between us. Current or future litigation may be
expensive and time consuming, and may impede or restrict our ability to operate effectively, which could negatively impact our results of operations.

Errors in estimates may have a significant negative impact on our financial condition and results of operations.

Assumptions relating to
the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many



15



---

##### Table of Contents

respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause
us to alter our budgets which may in turn affect our results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or
any other person that our objectives or plans will be achieved.



|ITEM2. | PROPERTIES
|------ | ----------

We do not own any real property. We
lease our corporate office and regional offices. The following table sets forth certain information regarding our leased properties as of December 31, 2007. The Texas lease is a full service lease under which we bear only those costs of
operations and property taxes exceeding the base-year expenses. The Florida lease is a sublease for which the monthly base rent covers all services and property taxes. We believe our current office space is suitable and adequate to meet our existing
needs and that additional facilities will be available for lease to meet our future needs.



|                                                                    |  |              |   |  |                              |       
|------------------------------------------------------------------- |  | ------------ | - |  | ---------------------------- | ------
|Name and Location                                                   |  | LeaseExpires |   |  | Monthly BaseRent(in Dollars)
|Corporate Headquarters, Regional, Administrative, and Other Offices |  |              |   |  |                              |       
|Tampa, Florida, Corporate Headquarters                              |  | 2008         |   |  | $                            | 21,114
|Grand Prairie, Texas                                                |  | 2008         |   |  |                              | 3,086 
|Indianapolis, Indiana                                               |  | (1           | ) |  |                              | 2,200 



|(1) | Beginning in November 2006, and in connection with a contract that started January 1, 2007 to service approximately 250,000 members of an Indiana health plan, we have rented
office space within the Indianapolis offices of the client at the rate of $2,200 per month. We expect to rent such space, which is not subject to a written lease agreement, for a time period at least equivalent to the initial two-year term of the
contract.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM3. | LEGAL PROCEEDINGS
|------ | -----------------

We and nine current and former
board members were named as defendants in two class action lawsuits filed by two shareholders on January 23, 2007 and February 1, 2007, respectively. In the similar complaints, filed in the Chancery Court of Delaware, the plaintiffs sought
permanent injunctive and other equitable relief to prevent Hythiam from acquiring 49.95% of our outstanding common shares that it does not currently own (either directly or through its wholly owned subsidiary, Woodcliff) from the remaining minority
shareholders. The plaintiffs alleged that the consideration being proposed to the minority shareholders by Hythiam was inadequate, through coercive means, without fair process and through material misleading information.

On May 25, 2007, we mutually terminated the Agreement and Plan of Merger. The lawsuits have now been dismissed as moot, but requests for attorney
fees by plaintiffs remain pending.

On June 15, 2007, a complaint was filed against us by two stockholders in the Delaware Court of
Chancery. The complaint seeks an order compelling us to deliver copies of requested books and records pursuant to Section 220 of the Delaware General Corporation Law. In addition, the complaint seeks payment of reasonable fees and expenses to
the plaintiffs and such other further relief that the Court may deem just and proper. We filed an answer to the complaint on July 11, 2007, in which we contend that the demand made by the plaintiffs does not comply with the form and manner of
making a demand for inspection under Section 220, that the plaintiffs failed to set forth or establish a proper purpose for inspection, and that the documents the plaintiffs seek to inspect are overly broad.



16



---

##### Table of Contents

PART II



|ITEM5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------ | ------------------------------------------------------------------------------------------------------------



| | (a) | Market Information  Our common stock is traded on the Over-The-Counter Bulletin Board under the symbol CHCR. The following table sets forth the range of high and low
bid quotations for the common stock, as reported by the OTCBB, for the fiscal quarters indicated. The market quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                       |  |                |  |       |      |     |     
|-------------------------------------- |  | -------------- |  | ----- | ---- | --- | ----
|                                       |  |                |  | Price
|                                       |  |                |  | HIGH  |      | LOW
|Year 2007                              |  | FIRST QUARTER  |  | $     | 2.00 |     | 0.79
|(January 1, 2007 to December 31, 2007) |  | SECOND QUARTER |  |       | 1.20 |     | 0.70
|                                       |  | THIRD QUARTER  |  |       | 1.30 |     | 0.88
|                                       |  | FOURTH QUARTER |  |       | 1.00 |     | 0.46
|                                       |  |                | 
|Transition Period                      |  | FIRST QUARTER  |  | $     | 2.45 |     | 1.73
|(June 1, 2006 to December 31, 2006)    |  | SECOND QUARTER |  |       | 2.25 |     | 1.80
|                                       |  | DECEMBER       |  |       | 2.05 |     | 1.80
|                                       |  |                | 
|Fiscal Year 2006                       |  | FIRST QUARTER  |  | $     | 2.50 |     | 1.50
|(June 1, 2005 to May 31, 2006)         |  | SECOND QUARTER |  |       | 2.10 |     | 1.25
|                                       |  | THIRD QUARTER  |  |       | 1.65 |     | 1.10
|                                       |  | FOURTH QUARTER |  |       | 2.55 |     | 1.40



| | (b) | Holders  As of March 11, 2008, we had 1,107 holders of record of our common stock.
| | --- | -----------------------------------------------------------------------------------



| | (c) | Dividends  We did not pay any cash dividends on our common stock during the year ended December 31, 2007, the seven months ended December 31, 2006 or during
the 2006 and 2005 fiscal years and do not contemplate the initiation of payment of any cash dividends in the foreseeable future. The holders of record of our Series A Shares are entitled to receive dividends in preference to the holders of our
common stock and any of our equity securities ranking junior to our Series A Shares, when and if declared by our Board. If declared, holders of our Series A Shares will receive dividends in an amount equal to the amount that would have been payable
had the Series A Shares been converted into shares of our common stock immediately prior to the declaration of such dividend. No dividends shall be authorized, declared, paid or set apart for payment on any class or series of the Companys
stock ranking, as to dividends, on a parity with or junior to the Series A Shares for any period unless full cumulative dividends have been, or contemporaneously are, authorized, declared, paid or set apart in trust for such payment on the
Series A Shares. In addition, as long as a majority of the 14,400 shares of our Series A Shares are outstanding, we cannot declare or pay any dividend or other distribution with respect to any equity securities without the affirmative vote of
holders of at least 50% of the outstanding shares of Series A Shares.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The equity compensation plan information contained in Item 12 of Part III of this Annual Report is incorporated herein by reference.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Performance Graph  Not applicable. This annual report on Form 10-K does not precede or accompany a proxy or information statement relating to an annual meeting of
security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.



17



---

##### Table of Contents

|ITEM6. | SELECTED FINANCIAL DATA
|------ | -----------------------

Prior to fiscal 1993, we
principally engaged in the ownership, operation, and management of psychiatric and substance abuse programs in Company owned, leased, or unaffiliated hospitals. During fiscal 1999, we completed our plan to dispose of our hospital business segment.
Fiscal 2004 results include a $387,000 charge related to such discontinued operations.

Fiscal 2003 results include a $7.7 million,
non-operating gain related to a settlement with the Internal Revenue Service (IRS). Additionally, fiscal 2003 results include a $470,000 gain included in discontinued operations related to the settlement of one matter covering our fiscal
years 1983 through 1986 involving Medi-Cal reimbursements paid to Brea Neuropsychiatric Hospital, a facility we owned until its disposal in fiscal year 1991.

The selected consolidated financial data that follows should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.



|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ----------------------------- | - | ------ | ------------------------- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                                                            |  | Year EndedDecember 31,                        |        |   | Seven MonthsEndedDecember 31, |   |        | Fiscal Year Ended May 31, | 
|                                                                            |  | 2007                                          |        |   | 2006                          |   |        | 2006                      |  |   | 2005   |   |  | 2004 |        |   | 2003 |  
|                                                                            |  | (Amounts in thousands, except per share data) |       
|CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                                 |  |                                               |        |   |                              
|Operating revenues                                                          |  | $                                             | 37,400 |   |                               | $ | 10,315 |                           |  | $ | 23,956 |   |  | $    | 24,473 |   |      | $ | 27,583 |   |  | $ | 32,104 |  
|Costs and expenses:                                                         |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Healthcare operating expenses                                               |  |                                               | 36,790 |   |                               |   | 9,713  |                           |  |   | 20,562 |   |  |      | 21,298 |   |      |   | 24,178 |   |  |   | 29,201 |  
|General and administrative expenses                                         |  |                                               | 4,032  |   |                               |   | 1,767  |                           |  |   | 3,316  |   |  |      | 3,078  |   |      |   | 3,385  |   |  |   | 3,459  |  
|(Recovery of) provision for doubtful accounts                               |  |                                               | (4     | ) |                               |   | (136   | )                         |  |   | (88    | ) |  |      | (4     | ) |      |   | (7     | ) |  |   | 20     |  
|Depreciation and amortization                                               |  |                                               | 154    |   |                               |   | 62     |                           |  |   | 87     |   |  |      | 96     |   |      |   | 107    |   |  |   | 195    |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|                                                                            |  |                                               | 40,972 |   |                               |   | 11,406 |                           |  |   | 23,877 |   |  |      | 24,468 |   |      |   | 27,663 |   |  |   | 32,875 |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Operating (loss) income from continuing operations before items shown below |  |                                               | (3,572 | ) |                               |   | (1,091 | )                         |  |   | 79     |   |  |      | 5      |   |      |   | (80    | ) |  |   | (771   | )
|Other income (expenses):                                                    |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net gain on IRS settlement                                                  |  |                                               |       |   |                               |   |       |                           |  |   |       |   |  |      |       |   |      |   |       |   |  |   | 7,717  |  
|Loss in connection with prepayment of note receivable                       |  |                                               |       |   |                               |   |       |                           |  |   |       |   |  |      |       |   |      |   | (20    | ) |  |   |       |  
|Loss from software development                                              |  |                                               |       |   |                               |   |       |                           |  |   | (123   | ) |  |      |       |   |      |   |       |   |  |   |       |  
|Loss on impairment of investment                                            |  |                                               |       |   |                               |   |       |                           |  |   | (17    | ) |  |      | (118   | ) |      |   |       |   |  |   |       |  
|Gain from sale of available-for-sale securities                             |  |                                               | 29     |   |                               |   |       |                           |  |   |       |   |  |      |       |   |      |   |       |   |  |   |       |  
|Gain from property insurance claim                                          |  |                                               |       |   |                               |   | 17     |                           |  |   |       |   |  |      |       |   |      |   |       |   |  |   |       |  
|Gain on sale of assets                                                      |  |                                               | 3      |   |                               |   | 2      |                           |  |   |       |   |  |      |       |   |      |   |       |   |  |   | 4      |  
|Loss on sale of assets                                                      |  |                                               |       |   |                               |   |       |                           |  |   |       |   |  |      |       |   |      |   |       |   |  |   | (5     | )
|Other non operating income, net                                             |  |                                               | 192    |   |                               |   | 254    |                           |  |   | 66     |   |  |      | 88     |   |      |   | 1      |   |  |   | 34     |  
|Interest income                                                             |  |                                               | 147    |   |                               |   | 58     |                           |  |   | 78     |   |  |      | 15     |   |      |   | 26     |   |  |   | 47     |  
|Interest expense                                                            |  |                                               | (190   | ) |                               |   | (113   | )                         |  |   | (186   | ) |  |      | (206   | ) |      |   | (215   | ) |  |   | (181   | )
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|(Loss) income from continuing operations before income taxes                |  |                                               | (3,391 | ) |                               |   | (873   | )                         |  |   | (103   | ) |  |      | (216   | ) |      |   | (288   | ) |  |   | 6,845  |  
|Income tax expense                                                          |  |                                               | 72     |   |                               |   | 43     |                           |  |   | 78     |   |  |      | 52     |   |      |   | 102    |   |  |   | 20     |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|(Loss) income from continuing operations                                    |  |                                               | (3,463 | ) |                               |   | (916   | )                         |  |   | (181   | ) |  |      | (268   | ) |      |   | (390   | ) |  |   | 6,825  |  
|(Loss) income from discontinued operations                                  |  |                                               |       |   |                               |   | (20    | )                         |  |   |       |   |  |      |       |   |      |   | (387   | ) |  |   | 633    |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net (loss) income attributable to common stockholders                       |  | $                                             | (3,463 | ) |                               | $ | (936   | )                         |  | $ | (181   | ) |  | $    | (268   | ) |      | $ | (777   | ) |  | $ | 7,458  |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|(Loss) income per common share - basic:                                     |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|(Loss) income from continuing operations                                    |  | $                                             | (0.45  | ) |                               | $ | (0.14  | )                         |  | $ | (0.03  | ) |  | $    | (0.05  | ) |      | $ | (0.09  | ) |  | $ | 1.75   |  
|(Loss) income from discontinued operations                                  |  |                                               |       |   |                               |   | (0.01  | )                         |  |   |       |   |  |      |       |   |      |   | (0.09  | ) |  |   | 0.16   |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net (loss) income                                                           |  | $                                             | (0.45  | ) |                               | $ | (0.15  | )                         |  | $ | (0.03  | ) |  | $    | (0.05  | ) |      | $ | (0.18  | ) |  | $ | 1.91   |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|(Loss) income per common share - diluted:                                   |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|(Loss) income from continuing operations                                    |  | $                                             | (0.45  | ) |                               | $ | (0.14  | )                         |  | $ | (0.03  | ) |  | $    | (0.05  | ) |      | $ | (0.09  | ) |  | $ | 1.57   |  
|(Loss) income from discontinued operations                                  |  |                                               |       |   |                               |   | (0.01  | )                         |  |   |       |   |  |      |       |   |      |   | (0.09  | ) |  |   | 0.15   |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net (loss) income                                                           |  | $                                             | (0.45  | ) |                               | $ | (0.15  | )                         |  | $ | (0.03  | ) |  | $    | (0.05  | ) |      | $ | (0.18  | ) |  | $ | 1.72   |  
|                                                                            |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|BALANCE SHEET DATA:                                                         |  |                                               |        |   |                               |   |        |                           |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Working capital (deficit)                                                   |  | $                                             | (721   | ) |                               | $ | 2,502  |                           |  | $ | 120    |   |  | $    | (3,589 | ) |      | $ | (4,098 | ) |  | $ | (4,447 | )
|Total assets                                                                |  |                                               | 8,232  |   |                               |   | 8,114  |                           |  |   | 8,182  |   |  |      | 6,448  |   |      |   | 6,225  |   |  |   | 6,379  |  
|Total long-term debt and capital lease obligations                          |  |                                               | 2,403  |   |                               |   | 2,402  |                           |  |   | 2,432  |   |  |      | 2,375  |   |      |   | 2,364  |   |  |   | 2,298  |  
|Stockholders deficit                                                       |  | $                                             | (4,132 | ) |                               | $ | (803   | )                         |  | $ | (743   | ) |  | $    | (4,117 | ) |      | $ | (4,725 | ) |  | $ | (4,990 | )



18



---

##### Table of Contents

|ITEM7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------ | -------------------------------------------------------------------------------------

This report includes forward-looking statements, the realization of which may be impacted by certain important factors discussed previously under
Item 1A Risk Factors  Important Factors Related to Forward-Looking Statements and Associated Risks.

OVERVIEW

We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf
of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. Our managed care operations include administrative service agreements,
fee-for-service agreements, and capitation contracts. The customer base for our services includes both private and governmental entities. Our services are provided primarily by unrelated vendors on a subcontract or subcapitated basis.

The following table sets forth our operating income (loss) for the years ended December 31, 2007 and 2006, the seven months ended December 31,
2006 and the fiscal years ended May 31, 2006 and 2005 (amounts in thousands):



|                                        |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | - | ------------------------------ | - | ------ | ------------------------ |  | - | ----------- | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                        |  | YearEnded December 31, |        |   | Seven MonthsEnded December 31, |   |        | Fiscal YearEnded May 31, | 
|                                        |  | 2007                   |        |   | 2006                           |   |        | 2006                     |  |   | 2005        |   |  | 2006 |        |   | 2005 |  
|                                        |  |                        |        |   | (unaudited)                    |   |        |                          |  |   | (unaudited) |   |  |      |        |   |      |  
|Operating revenues:                     |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Capitated contracts                     |  | $                      | 36,295 |   |                                | $ | 18,255 |                          |  | $ | 9,829       |   |  | $    | 14,618 |   |      | $ | 23,044 |   |  | $ | 22,062 |  
|Non-capitated sources                   |  |                        | 1,105  |   |                                |   | 749    |                          |  |   | 486         |   |  |      | 649    |   |      |   | 912    |   |  |   | 2,411  |  
|                                        |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total operating revenues                |  |                        | 37,400 |   |                                |   | 19,004 |                          |  |   | 10,315      |   |  |      | 15,267 |   |      |   | 23,956 |   |  |   | 24,473 |  
|                                        |  |                        |        |   |                                |  
|Operating expenses:                     |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Healthcare operating expenses:          |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Claims expense (1)                      |  |                        | 30,315 |   |                                |   | 13,005 |                          |  |   | 7,575       |   |  |      | 10,820 |   |      |   | 16,250 |   |  |   | 16,379 |  
|Other healthcare operating expenses (1) |  |                        | 6,475  |   |                                |   | 3,856  |                          |  |   | 2,138       |   |  |      | 2,594  |   |      |   | 4,312  |   |  |   | 4,919  |  
|                                        |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total healthcare operating expenses     |  |                        | 36,790 |   |                                |   | 16,861 |                          |  |   | 9,713       |   |  |      | 13,414 |   |      |   | 20,562 |   |  |   | 21,298 |  
|General and administrative expenses     |  |                        | 4,032  |   |                                |   | 3,124  |                          |  |   | 1,767       |   |  |      | 1,959  |   |      |   | 3,316  |   |  |   | 3,078  |  
|Recovery of doubtful accounts           |  |                        | (4     | ) |                                |   | (188   | )                        |  |   | (136        | ) |  |      | (36    | ) |      |   | (88    | ) |  |   | (4     | )
|Depreciation and amortization           |  |                        | 154    |   |                                |   | 98     |                          |  |   | 62          |   |  |      | 51     |   |      |   | 87     |   |  |   | 96     |  
|                                        |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total operating expenses                |  |                        | 40,972 |   |                                |   | 19,895 |                          |  |   | 11,406      |   |  |      | 15,388 |   |      |   | 23,877 |   |  |   | 24,468 |  
|                                        |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  
|Operating (loss) income                 |  | $                      | (3,572 | ) |                                | $ | (891   | )                        |  | $ | (1,091      | ) |  | $    | (121   | ) |      | $ | 79     |   |  | $ | 5      |  
|                                        |  |                        |        |   |                                |   |        |                          |  |   |             |   |  |      |        |   |      |   |        |   |  |   |        |  



|(1) | Claims expense reflects the costs of revenue of capitated contracts, and other healthcare operating expenses reflects the cost of revenue of capitated and non-capitated contracts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS  YEAR ENDED
DECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.

The increase in capitated contract revenue is primarily attributable to the addition of our Indiana contract, which accounted for approximately $15.0
million in revenue for the year ended December 31, 2007. Additional business from existing clients in Pennsylvania and Michigan also contributed an additional $3.1 million. The increase in non-capitated revenue is primarily attributable to the
additional business from an existing customer in Texas.

Claims expense on capitated contracts increased approximately $17.3 million or
133.1% for the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase is due to the addition of the capitated revenues mentioned above. Claims expense as a percentage of capitated revenues increased from
71.2% for the year ended December 31, 2006 to 83.5% for the year ended December 31, 2007 due to a high medical loss ratio experienced with our major Indiana client. Other healthcare operating expenses, which are incurred to service both
capitated and non-capitated contracts, increased approximately $2.6 million, or 67.9%, due to staff increases in



19



---

##### Table of Contents

response to the addition of revenues in Indiana, Pennsylvania and Michigan. As a percentage of total revenue, other healthcare operating expenses decreased
from 20.3% for the period ended December 31, 2006 to 17.3% for the period ended December 31, 2007.

General and administrative
expenses increased by $908,000, or 29.1%, for the year ended December 31, 2007 as compared to the year ended December 31, 2006. This increase is primarily attributable to the $416,000 severance benefit of two years salary paid to our
former CEO upon her resignation pursuant to her employment agreement following the January 12, 2007 change in ownership of Woodcliff, the expensing of $167,000 of prepaid director fees following the resignation of certain directors, and legal
and professional fees of $301,000 incurred related to the proposed merger with Hythiam. General and administrative expense as a percentage of operating revenue decreased from 16.4% for the period ended December 31, 2006 to 10.8% for the period
ended December 31, 2007.

RESULTS OF OPERATIONS  SEVEN MONTHS
ENDED DECEMBER 31, 2006 AS COMPARED TO THE SEVEN MONTHS ENDED DECEMBER 31, 2005.

The decrease in capitated contract revenue is primarily attributable to the termination of our Connecticut contract, the loss of which
accounted for $3.4 million less revenue for the seven months ended December 31, 2006 versus 2005 and the termination of a Texas contract, the loss of which accounted for $3.2 million less revenue for the same periods. This was partially offset
by additional business from existing clients in Pennsylvania, Texas, Michigan and Maryland. The decrease in non-capitated revenue is primarily attributable to the loss of a management services only customer in Michigan offset by additional business
in Texas and Florida and a new client in Connecticut.

Claims expense on capitated contracts decreased approximately $3.2 million or 30.0%
for the seven months ended December 31, 2006 as compared to the seven months ended December 31, 2005. The reduction is due to the loss of capitated revenue as mentioned above. Claims expense as a percentage of capitated revenues increased
from 74.0% for the period ended December 31, 2005 to 77.1% for the period ended December 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately
$456,000, or 17.6%, due to staff reductions in response to the loss of revenues in Michigan, Connecticut and Texas. As a percentage of total revenue, other healthcare operating expenses increased from 17.0% for the period ended December 31,
2005 to 20.7% for the period ended December 31, 2006.

General and administrative expenses decreased by $192,000, or 9.8%, for the
seven months ended December 31, 2006 as compared to the seven months ended December 31, 2005. This decrease is primarily attributable to indirect costs of the June 2005 sale of Series A Preferred Stock, increased costs for marketing
consultants engaged to obtain additional commercial business, and legal expenses associated with our 2005 Annual Meeting and changes to the corporate charter in the period ended December 31, 2005. General and administrative expense as a
percentage of operating revenue increased from 12.8% for the period ended December 31, 2005 to 17.1% for the period ended December 31, 2006.

RESULTS OF OPERATIONS FISCAL YEAR ENDED MAY 31, 2006 AS COMPARED TO
THE FISCAL YEAR ENDED MAY 31, 2005.

Capitated contract
revenues increased 4.5% or approximately $1.0 million to $23.0 million for the year ended May 31, 2006 compared to $22.0 million for the year ended May 31, 2005. This increase in revenue is primarily attributable to additional business
from existing clients in Indiana and new customers in Pennsylvania and Maryland, but was partially offset by the termination of our Connecticut contract, the loss of which accounted for $1.9 million less revenue in fiscal 2006 than in fiscal 2005.
Non-capitated revenue declined 62.2%, or $1.5 million, to $0.9 million for the fiscal year ended May 31, 2006, compared to $2.4 million for the fiscal year ended May 31, 2005. The decrease is primarily attributable to the loss of two
management services only customers in Michigan and an ASO client in Texas.

Claims expense on capitated contracts decreased approximately
$129,000 or 0.8% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005. The reduction is due to decreased utilization of covered services. Claims expense as a percentage of capitated revenues decreased
from 74.2% for the fiscal year ended May 31, 2005 to 70.5% for the fiscal year ended May 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately
$607,000, or 12.3% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005, due to staff reductions in response to the loss of revenues in Michigan, Connecticut and Texas. As a percentage of total revenue,
other healthcare operating expenses decreased from 20.1% for fiscal 2005 to 18.0% for fiscal 2006.



20



---

##### Table of Contents

General and administrative expenses increased by $238,000, or 7.7%, for the fiscal year ended
May 31, 2006 as compared to the fiscal year ended May 31, 2005. This increase is primarily attributable to indirect costs of the June 2005 sale of Series A Preferred Stock, increased costs for marketing consultants engaged to obtain
additional commercial business, and legal expenses associated with our 2005 Annual Meeting and changes to the corporate charter. General and administrative expense as a percentage of operating revenue increased from 12.6% for the fiscal year ended
May 31, 2005 to 13.8% for the fiscal year ended May 31, 2006.

SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May, and consistently low utilization by members
during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the June through August period and
a negative impact on our gross margins and operating profits during the months of March through May.

LIQUIDITY AND
CAPITAL RESOURCES

During the year ended December 31, 2007, our cash and cash equivalents increased by
$770,000. Net cash provided by continuing operations amounted to $826,000. Cash used in investing activities is comprised primarily of $58,000 in additions to property and equipment offset by $58,000 in proceeds from sales of available-for-sale
securities, sales of equipment and payments received on notes receivable. Cash provided by financing activities consists of $19,000 in net proceeds from the issuance of common stock less $55,000 of repayment of liabilities. At December 31,
2007, cash and cash equivalents amounted to $6.3 million. We believe we have sufficient working capital to sustain current operations and meet our current obligations during the next twelve months.

Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are
subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain
profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $5.5 million accrued claims payable amount
reported as of December 31, 2007.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following is a schedule at December 31, 2007 of our long-term contractual commitments, future minimum lease payments under non-cancelable
operating lease arrangements, and other long-term obligations:



|                                               |  |                        |       |                |     |            |       |            |    |              |  
|---------------------------------------------- |  | ---------------------- | ----- | -------------- | --- | ---------- | ----- | ---------- | -- | ------------ | -
|                                               |  | Payments Due by Period
|                                               |  | Total                  |       | LessThan 1Year |     | 1  3Years |       | 4  5Years |    | After 5Years
|                                               |  | (Amounts in thousands)
|Long-term Debt Obligations (a)                 |  | $                      | 2,244 |                |    |            | 2,244 |            |   |              | 
|Capital Lease Obligations and related interest |  |                        | 199   |                | 68  |            | 110   |            | 21 |              | 
|Operating Lease Obligations                    |  |                        | 376   |                | 300 |            | 44    |            | 32 |              | 
|                                               |  |                        |       |                |     |            |       |            |    |              |  
|Total                                          |  | $                      | 2,819 |                | 368 |            | 2,398 |            | 53 |              | 
|                                               |  |                        |       |                |     |            |       |            |    |              |  



|(a) | Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 12  Long-term Debt to the audited, consolidated financial statements).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected
and disclosed in the consolidated financial statements, most notably our estimate for claims incurred but not yet reported (IBNR). On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process
to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.

We believe our accounting policies specific to our revenue recognition, accrued claims payable and
claims expense, premium deficiencies, goodwill, and stock compensation expense involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 2  Summary of Significant Accounting
Policies to the audited, consolidated financial statements).

REVENUE RECOGNITION

We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs. Revenue under the vast
majority of these agreements is earned and recognized monthly based on the number of covered members as reported to us by our clients regardless of whether services actually provided are lesser or greater than anticipated when we entered into such
contracts (generally referred to as capitation arrangements). The information regarding the number of covered members is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy in
calculating the amount of revenue to be recognized. Consequently, the vast majority of our revenue is determined by the monthly receipt of covered member information and the associated payment from the client, thereby removing uncertainty and
precluding us from needing to make assumptions to estimate monthly revenue amounts.

We may experience adjustments to our revenues to
reflect changes in the number and eligibility status of members subsequent to when revenue is recognized. Subsequent adjustments to our revenue have not been material in the past.

ACCRUED CLAIMS PAYABLE AND CLAIMS EXPENSE

Healthcare operating expenses are composed of claims expense and other healthcare operating expenses. Claims expense includes amounts paid to hospitals, physician groups and other licensed behavioral healthcare
professionals. Other healthcare operating expenses include items such as information systems, provider contracting, case management and quality assurance, attributable to both capitated and non-capitated contracts.

The cost of behavioral health services is recognized in the period in which an eligible member actually receives services and includes an estimate of
IBNR. We contract with various healthcare providers including hospitals, physician groups and other managed care organizations either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we
receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether (1) the member is eligible to receive such services, (2) the service provided is
medically necessary and is covered by the benefit plans certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for
payment and the associated cost of behavioral health services is recognized. If the claim is denied, the service provider is notified and has appeal rights under their contract with us.

Accrued claims payable consists primarily of reserves established for reported claims and claims IBNR which are unpaid through the respective balance
sheet dates. Our policy is to record managements best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to reflect any change
in the estimated liability as more information becomes available. In deriving a range of estimates, management considers qualitative factors, authorization information, and an actuarial model that incorporates past claims payment experience,
enrollment data and key assumptions such as trends in healthcare costs and seasonality. The accrued claims payable ranges were between $4.9 and $5.5 million at December 31, 2007, between $2.6 and $2.9 million at December 31, 2006, and
between $2.6 and $2.8 million at May 31, 2006. To determine the best estimates, management reviews utilization statistics,



22



---

##### Table of Contents

authorized healthcare service data, calculated completion factors and other data available at and subsequent to the balance sheet dates. The best estimates
at December 31, 2007, December 31, 2006 and May 31, 2006 were $5.5 million, $2.7 million and $2.8 million respectively. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims
liability for the last three years.

The following table provides a reconciliation of the beginning and ending balance of accrued claims
payable for the year ended December 31, 2007, the seven months ended December 31, 2006 and the fiscal year ended May 31, 2006:



|                                 |  |                             |        |   |                                     |       |   |                               |       
|-------------------------------- |  | --------------------------- | ------ | - | ----------------------------------- | ----- | - | ----------------------------- | ------
|                                 |  | Year EndedDecember 31, 2007 |        |   | Seven Months EndedDecember 31, 2006 |       |   | Fiscal Year EndedMay 31, 2006
|                                 |  | (Amounts in thousands)     
|Beginning accrued claims payable |  | $                           | 2,746  |   |                                     | 2,790 |   |                               | 3,730 
|Claims expense:                  |  |                             |        |   |                                     |       |   |                               |       
|Current period                   |  |                             | 30,674 |   |                                     | 7,576 |   |                               | 16,174
|Prior period                     |  |                             | (359   | ) |                                     | (1    | ) |                               | 76    
|                                 |  |                             |        |   |                                     |       |   |                               |       
|Total claims expense             |  |                             | 30,315 |   |                                     | 7,575 |   |                               | 16,250
|Claims payments:                 |  |                             |        |   |                                     |       |   |                               |       
|Current period                   |  |                             | 25,210 |   |                                     | 4,830 |   |                               | 13,384
|Prior period                     |  |                             | 2,387  |   |                                     | 2,789 |   |                               | 3,806 
|                                 |  |                             |        |   |                                     |       |   |                               |       
|Total claims payments            |  |                             | 27,597 |   |                                     | 7,619 |   |                               | 17,190
|                                 |  |                             |        |   |                                     |       |   |                               |       
|Ending accrued claims payable    |  | $                           | 5,464  |   |                                     | 2,746 |   |                               | 2,790 
|                                 |  |                             |        |   |                                     |       |   |                               |       

Changes in prior year claims expense were primarily due to changes in utilization patterns and
changes in claim submission timeframes by providers. Management considers these changes in claims expenses to be immaterial when compared to the total claims expenses incurred in prior years.

Accrued claims payable at December 31, 2007 and 2006 and May 31, 2006 is comprised of approximately $1.1 million, $0.7 million and $1.1
million, respectively, of submitted and approved claims which had not yet been paid, and $4.4 million, $2.0 million and $1.7 million for IBNR claims, respectively.

Many aspects of our business are not predictable with consistency, and therefore, estimating IBNR claims involves a significant amount of management judgment. Actual claims incurred could differ from the estimated
accrued claims payable amount presented. The following are factors that would have an impact on our future operations and financial condition:



| |  |  | Changes in utilization patterns
| | - |  | -------------------------------



| |  |  | Changes in healthcare costs
| | - |  | ---------------------------



| |  |  | Changes in claims submission timeframes by providers
| | - |  | ----------------------------------------------------



| |  |  | Success in renegotiating contracts with healthcare providers
| | - |  | ------------------------------------------------------------



| |  |  | Occurrence of catastrophes
| | - |  | --------------------------



| |  |  | Changes in benefit plan design
| | - |  | ------------------------------



| |  |  | The impact of present or future state and federal regulations.
| | - |  | --------------------------------------------------------------



23



---

##### Table of Contents

A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at
December 31, 2007 could increase our claims expense by approximately $193,000 as illustrated in the table below:



|                            |  |                                     |          |  
|--------------------------- |  | ----------------------------------- | -------- | -
|Change in Healthcare Costs: | 
|(Decrease) Increase         |  | (Decrease)Increasein Claims Expense |         
|(5)%                        |  | $                                   | (195,000 | )
|5%                          |  | $                                   | 193,000  |  

PREMIUM DEFICIENCIES

We accrue losses under our capitated contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
We perform this loss accrual analysis on a specific contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contracts specific terms related to future
revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.

At any time prior to the end of a contract or contract renewal, if a capitated contract is not meeting its financial goals, we generally have the ability
to cancel the contract with 60 to 90 days written notice. Prior to cancellation, we will usually submit a request for a rate increase accompanied by supporting utilization data. Although our clients have historically been generally receptive
to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the contract and limit our risk to a short-term period.

On a quarterly basis, we perform a review of our portfolio of contracts for the purpose of identifying loss contracts (as defined in the
American Institute of Certified Public Accountants Audit and Accounting Guide  Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. During the year ended December 31, 2007, we
identified two contracts that were not meeting their financial goals. We successfully obtained a rate increase from one client effective January 1, 2008. We are negotiating and believe we will receive a rate increase from the other client
effective January 1, 2008, provided we comply with monthly performance measures we believe we will meet. The rate increase would amount to approximately $2 million per annum. At December 31, 2007, we believe no contract loss reserve for
future periods is necessary for these contracts.

GOODWILL

We evaluate at least annually the amount of our recorded goodwill by performing an impairment test that compares the carrying amount to an estimated fair value. In estimating the fair value, management makes its best
assumptions regarding future cash flows and a discount rate to be applied to the cash flows to yield a present, fair value of equity. As a result of such tests, management believes there is no material risk of loss from impairment of goodwill.
However, actual results may differ significantly from managements assumptions, resulting in potentially adverse impact to our consolidated financial statements.

STOCK COMPENSATION EXPENSE

We issue stock-based awards to our
employees and members of our Board of Directors. Effective June 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R Share-Based Payment and elected to apply the modified-prospective
method to measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model,
which requires certain variables for input to calculate the fair value of a stock award on the grant date. These variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate, and expected
dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates.



24



---

##### Table of Contents

Expected Volatility

We estimate the volatility of the share price by using historical data of our traded stock in combination with our expectation of the extent of
fluctuation in future stock prices. We believe our historical volatility is more representative of future stock price volatility and as such it has been given greater weight in estimating future volatility.

Expected Term

A variety of
factors are considered in determining the expected term of options granted. Options granted are grouped by their homogeneity based on the optionees position, whether managerial or clerical, and length of service and turnover rate. Where
possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.

Expected Forfeiture Rate

We generally separate our option awards into two groups: employee and non-employee awards. The historical data of each group are analyzed independently to estimate the forfeiture rate of options at the time of grant.
These estimates are revised in subsequent periods if actual forfeitures differ from estimated forfeitures.

RECENT
ACCOUNTING PRONOUNCEMENTS

Effective June 1, 2006, we adopted the fair value recognition provisions
of SFAS 123R, as previously discussed in Critical Accounting Estimates immediately preceding.

In June 2006, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that
companies recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007
with no impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, (SFAS 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the statement to determine what, if any, impact it will have on our consolidated
financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 provides that companies may elect to measure many financial instruments and certain other items at fair value on a contract-by-contract basis, with changes in fair value recognized in
earnings each reporting period. The election, called the fair value option, will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective
as of the beginning of a companys first fiscal year that begins after November 15, 2007. We do not believe SFAS 159 will have a significant impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) replaces SFAS
No. 141, Business Combinations, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141,
better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the
acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business
combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. We will adopt this statement as of January 1, 2009. We are currently evaluating the impact SFAS 141(R) will have
on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 requires that non-controlling (or minority)



25



---

##### Table of Contents

interests in subsidiaries be reported in the equity section of the companys balance sheet, rather than in a mezzanine section of the balance sheet
between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling companys income statement. SFAS 160 also establishes guidelines for accounting for changes
in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The adoption of SFAS 160 is not expected to have a
material impact on our financial statements.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of
this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included in this annual report on Form 10-K and in
our other reports, Securities and Exchange Commission (SEC) filings, statements, and presentations is forward looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning
our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, and the ability to obtain new behavioral healthcare contracts. Such forward-looking information involves
important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in our other reports, SEC filings, statements, and presentations. These risks and
uncertainties include, but are not limited to, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, varying trends in member utilization, our ability to
manage healthcare operating expenses, the profitability of our capitated contracts, cost of care, seasonality, the risk that any definitive agreements or additional business will result from letters of intent entered into by us, and other risks
detailed from time to time in our SEC reports.



|ITEM7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

While we currently have market risk sensitive instruments, we have no significant exposure to changing interest rates as the interest rate on our long-term debt is fixed. Additionally, we do not use derivative financial instruments for
investment or trading purposes and our investments are generally limited to cash deposits.



26



---

##### Table of Contents

|ITEM8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------ | --------------------------------------------------------

Index to Consolidated Financial Statements

Year Ended December 31, 2007,

Seven Months Ended December 31, 2006, and

Fiscal Years Ended May 31, 2006 and 2005



|                                                                                                                                                                   |  |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----
|Report of Kirkland, Russ, Murphy & Tapp P.A.                                                                                                                       |  | 28   
|Consolidated Balance Sheets, December 31, 2007 and 2006                                                                                                            |  | 29   
|Consolidated Statements of Operations, Year Ended December 31, 2007, Seven Months Ended December 31, 2006, and Fiscal Years Ended May 31, 2006 and 2005            |  | 30   
|Consolidated Statements of Stockholders Deficit, Year Ended December 31, 2007, Seven Months Ended December 31, 2006, and Fiscal Years Ended May 31, 2006 and 2005 |  | 31   
|Consolidated Statements of Cash Flows, Year Ended December 31, 2007, Seven Months Ended December 31, 2006, and Fiscal Years Ended May 31, 2006 and 2005            |  | 32   
|Notes to Consolidated Financial Statements                                                                                                                         |  | 33-49



27



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Comprehensive Care Corporation

We have audited the
accompanying consolidated balance sheets of Comprehensive Care Corporation and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders deficit and cash flows for the year ended
December 31, 2007, the seven months ended December 31, 2006, and the years ended May 31, 2006 and 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Comprehensive Care Corporation and Subsidiaries as of December 31, 2007 and 2006 and the consolidated results of their operations and
their cash flows for the year ended December 31, 2007, the seven months ended December 31, 2006, and the years ended May 31, 2006 and 2005, in conformity with U.S. generally accepted accounting principles.



|                                      
|--------------------------------------
|/s/ Kirkland, Russ, Murphy & Tapp P.A.
|                                      
|Clearwater, Florida                   
|March 11, 2008                        



28



---

##### Table of Contents

CONSOLIDATED BALANCE SHEETS



|                                                                                                                           |  |                        |         |   |                  |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | ------- | -
|                                                                                                                           |  | December 31,2007       |         |   | December 31,2006 |        
|                                                                                                                           |  | (Amounts in thousands) |        
|ASSETS                                                                                                                     |  |                        |         |   |                  |         |  
|Current assets:                                                                                                            |  |                        |         |   |                  |         |  
|Cash and cash equivalents                                                                                                  |  | $                      | 6,313   |   |                  | 5,543   |  
|Accounts receivable, less allowance for doubtful accounts of $0 and $6, respectively                                       |  |                        | 35      |   |                  | 163     |  
|Other current assets                                                                                                       |  |                        | 407     |   |                  | 793     |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total current assets                                                                                                       |  |                        | 6,755   |   |                  | 6,499   |  
|                                                                                                                           |  |                       
|Property and equipment, net                                                                                                |  |                        | 333     |   |                  | 377     |  
|Note receivable                                                                                                            |  |                        | 17      |   |                  | 44      |  
|Goodwill, net                                                                                                              |  |                        | 991     |   |                  | 991     |  
|Other assets                                                                                                               |  |                        | 136     |   |                  | 203     |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total assets                                                                                                               |  | $                      | 8,232   |   |                  | 8,114   |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|                                                                                                                           |  |                       
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                      |  |                        |         |   |                  |         |  
|Current liabilities:                                                                                                       |  |                        |         |   |                  |         |  
|Accounts payable and accrued liabilities                                                                                   |  | $                      | 1,918   |   |                  | 1,201   |  
|Accrued claims payable                                                                                                     |  |                        | 5,464   |   |                  | 2,746   |  
|Income taxes payable                                                                                                       |  |                        | 94      |   |                  | 50      |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total current liabilities                                                                                                  |  |                        | 7,476   |   |                  | 3,997   |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Long-term liabilities:                                                                                                     |  |                        |         |   |                  |         |  
|Long-term debt                                                                                                             |  |                        | 2,244   |   |                  | 2,244   |  
|Accrued reinsurance claims payable                                                                                         |  |                        | 2,526   |   |                  | 2,516   |  
|Other liabilities                                                                                                          |  |                        | 118     |   |                  | 160     |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total long-term liabilities                                                                                                |  |                        | 4,888   |   |                  | 4,920   |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total liabilities                                                                                                          |  |                        | 12,364  |   |                  | 8,917   |  
|                                                                                                                           |  |                        |         |   |                  |         |  
|Stockholders deficit:                                                                                                     |  |                        |         |   |                  |         |  
|Preferred stock, $50.00 par value; authorized 18,740 shares; 14,400 issued                                                 |  |                        | 720     |   |                  | 720     |  
|Common stock, $0.01 par value; authorized 30,000,000 shares; issued and outstanding 7,702,766, and 7,655,283, respectively |  |                        | 77      |   |                  | 77      |  
|Additional paid-in capital                                                                                                 |  |                        | 57,637  |   |                  | 57,503  |  
|Accumulated deficit                                                                                                        |  |                        | (62,566 | ) |                  | (59,103 | )
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total stockholders deficit                                                                                                |  |                        | (4,132  | ) |                  | (803    | )
|                                                                                                                           |  |                        |         |   |                  |         |  
|Total liabilities and stockholders deficit                                                                                |  | $                      | 8,232   |   |                  | 8,114   |  
|                                                                                                                           |  |                        |         |   |                  |         |  

See accompanying report of independent registered public accounting firm and notes to the
consolidated financial statements.



29



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in
thousands, except per share data)



|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|-------------------------------------------------------- | ---- | ---------------------- | ------ | ---- | ---------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | ------ | -
|                                                         |      | Year EndedDecember 31, |        |      | SevenMonthsEndedDecember 31, |        |      | Fiscal Year Ended May 31, |       
|                                                         | 2007 |                        |        | 2006 |                              |        | 2006 |                           |        | 2005 | 
|Operating Revenues                                       |      | $                      | 37,400 |      |                              | 10,315 |      |                           | 23,956 |      |  | 24,473 |  
|                                                         |      |                        |        |     
|Costs and Expenses:                                      |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Healthcare operating expenses                            |      |                        | 36,790 |      |                              | 9,713  |      |                           | 20,562 |      |  | 21,298 |  
|General and administrative expenses                      |      |                        | 4,032  |      |                              | 1,767  |      |                           | 3,316  |      |  | 3,078  |  
|Recovery of doubtful accounts                            |      |                        | (4     | )    |                              | (136   | )    |                           | (88    | )    |  | (4     | )
|Depreciation and amortization                            |      |                        | 154    |      |                              | 62     |      |                           | 87     |      |  | 96     |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|                                                         |      |                        | 40,972 |      |                              | 11,406 |      |                           | 23,877 |      |  | 24,468 |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Operating (loss) income before items shown below         |      |                        | (3,572 | )    |                              | (1,091 | )    |                           | 79     |      |  | 5      |  
|Other income (expense):                                  |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Gain from sale of available-for-sale securities          |      |                        | 29     |      |                              |       |      |                           |       |      |  |       |  
|Gain from property insurance claim                       |      |                        |       |      |                              | 17     |      |                           |       |      |  |       |  
|Gain on sale of assets                                   |      |                        | 3      |      |                              | 2      |      |                           |       |      |  |       |  
|Loss from software development                           |      |                        |       |      |                              |       |      |                           | (123   | )    |  |       |  
|Loss on impairment  investment in marketable securities |      |                        |       |      |                              |       |      |                           | (17    | )    |  | (118   | )
|Other non-operating income, net                          |      |                        | 192    |      |                              | 254    |      |                           | 66     |      |  | 88     |  
|Interest income                                          |      |                        | 147    |      |                              | 58     |      |                           | 78     |      |  | 15     |  
|Interest expense                                         |      |                        | (190   | )    |                              | (113   | )    |                           | (186   | )    |  | (206   | )
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Loss from continuing operations before income taxes      |      |                        | (3,391 | )    |                              | (873   | )    |                           | (103   | )    |  | (216   | )
|Income tax expense                                       |      |                        | 72     |      |                              | 43     |      |                           | 78     |      |  | 52     |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Loss from continuing operations                          |      |                        | (3,463 | )    |                              | (916   | )    |                           | (181   | )    |  | (268   | )
|Loss from discontinued operations                        |      |                        |       |      |                              | (20    | )    |                           |       |      |  |       |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Net loss                                                 |      | $                      | (3,463 | )    |                              | (936   | )    |                           | (181   | )    |  | (268   | )
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Loss per common share - basic:                           |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Loss from continuing operations                          |      | $                      | (0.45  | )    |                              | (0.14  | )    |                           | (0.03  | )    |  | (0.05  | )
|Loss from discontinued operations                        |      |                        |       |      |                              | (0.01  | )    |                           |       |      |  |       |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Net loss                                                 |      | $                      | (0.45  | )    |                              | (0.15  | )    |                           | (0.03  | )    |  | (0.05  | )
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Loss per common share - diluted:                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Loss from continuing operations                          |      | $                      | (0.45  | )    |                              | (0.14  | )    |                           | (0.03  | )    |  | (0.05  | )
|Loss from discontinued operations                        |      |                        |       |      |                              | (0.01  | )    |                           |       |      |  |       |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Net loss                                                 |      | $                      | (0.45  | )    |                              | (0.15  | )    |                           | (0.03  | )    |  | (0.05  | )
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Weighted average common shares outstanding:              |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Basic                                                    |      |                        | 7,697  |      |                              | 6,445  |      |                           | 5,808  |      |  | 4,935  |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  
|Diluted                                                  |      |                        | 7,697  |      |                              | 6,445  |      |                           | 5,808  |      |  | 4,935  |  
|                                                         |      |                        |        |      |                              |        |      |                           |        |      |  |        |  

See accompanying report of independent registered public accounting firm and notes to the consolidated financial
statements.



30



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

(In thousands)



|                                                                 |  |                |  |             |     |                   |       |             |   |         |          |         |  |                    |              |  |    |         |  |        |  
|---------------------------------------------------------------- |  | -------------- |  | ----------- | --- | ----------------- | ----- | ----------- | - | ------- | -------- | ------- |  | ------------------ | ------------ |  | -- | ------- |  | ------ | -
|                                                                 |  | PREFERREDSTOCK |  | COMMONSTOCK |     | ADDITIONALPAID-IN |       | ACCUMULATED |   |         | DEFERRED |         |  | TOTALSTOCKHOLDERS |             
|                                                                 |  | SHARES         |  | AMOUNT      |     | SHARES            |       | AMOUNT      |   | CAPITAL |          | DEFICIT |  |                    | COMPENSATION |  |    | DEFICIT | 
|Balance, May 31, 2004                                            |  |               |  | $           |    |                   | 4,673 |             | $ | 47      |          | 52,950  |  | (57,718            | )            |  | (4 | )       |  | (4,725 | )
|Net loss                                                         |  |               |  |             |    |                   |      |             |   |        |          |        |  | (268               | )            |  |   |         |  | (268   | )
|Shares issued in connection with private transactions            |  |               |  |             |    |                   | 775   |             |   | 8       |          | 535     |  |                   |              |  |   |         |  | 543    |  
|Compensatory stock options and warrants granted to non-employees |  |               |  |             |    |                   | 18    |             |   |        |          | 31      |  |                   |              |  |   |         |  | 31     |  
|Amortization of deferred compensation                            |  |               |  |             |    |                   |      |             |   |        |          |        |  |                   |              |  | 4  |         |  | 4      |  
|Warrants issued in connection with private transaction           |  |               |  |             |    |                   |      |             |   |        |          | 234     |  |                   |              |  |   |         |  | 234    |  
|Exercise of stock options                                        |  |               |  |             |    |                   | 117   |             |   | 1       |          | 63      |  |                   |              |  |   |         |  | 64     |  
|                                                                 |  |                |  |             |     |                   |       |             |   |         |          |         |  |                    |              |  |    |         |  |        |  
|Balance, May 31, 2005                                            |  |               |  | $           |    |                   | 5,583 |             | $ | 56      |          | 53,813  |  | (57,986            | )            |  |   |         |  | (4,117 | )
|Net loss                                                         |  |               |  |             |    |                   |      |             |   |        |          |        |  | (181               | )            |  |   |         |  | (181   | )
|Shares issued in connection with private transactions            |  | 14             |  |             | 720 |                   |      |             |   |        |          | 2,650   |  |                   |              |  |   |         |  | 3,370  |  
|Compensatory stock issued to non-employees                       |  |               |  |             |    |                   | 34    |             |   |        |          | 53      |  |                   |              |  |   |         |  | 53     |  
|Exercise of stock options                                        |  |               |  |             |    |                   | 282   |             |   | 3       |          | 129     |  |                   |              |  |   |         |  | 132    |  
|                                                                 |  |                |  |             |     |                   |       |             |   |         |          |         |  |                    |              |  |    |         |  |        |  
|Balance, May 31, 2006                                            |  | 14             |  | $           | 720 |                   | 5,899 |             | $ | 59      |          | 56,645  |  | (58,167            | )            |  |   |         |  | (743   | )
|Net loss                                                         |  |               |  |             |    |                   |      |             |   |        |          |        |  | (936               | )            |  |   |         |  | (936   | )
|Shares issued in connection with private transactions            |  |               |  |             |    |                   | 1,739 |             |   | 17      |          | 768     |  |                   |              |  |   |         |  | 785    |  
|Compensatory stock issued to non-employees                       |  |               |  |             |    |                   | 17    |             |   | 1       |          | 33      |  |                   |              |  |   |         |  | 34     |  
|Expense of stock options                                         |  |               |  |             |    |                   |      |             |   |        |          | 57      |  |                   |              |  |   |         |  | 57     |  
|                                                                 |  |                |  |             |     |                   |       |             |   |         |          |         |  |                    |              |  |    |         |  |        |  
|Balance, December 31, 2006                                       |  | 14             |  | $           | 720 |                   | 7,655 |             | $ | 77      |          | 57,503  |  | (59,103            | )            |  |   |         |  | (803   | )
|Net loss                                                         |  |               |  |             |    |                   |      |             |   |        |          |        |  | (3,463             | )            |  |   |         |  | (3,463 | )
|Compensatory stock issued to non-employees                       |  |               |  |             |    |                   | 10    |             |   |        |          | 25      |  |                   |              |  |   |         |  | 25     |  
|Exercise of stock options                                        |  |               |  |             |    |                   | 38    |             |   |        |          | 19      |  |                   |              |  |   |         |  | 19     |  
|Expense of stock options                                         |  |               |  |             |    |                   |      |             |   |        |          | 90      |  |                   |              |  |   |         |  | 90     |  
|                                                                 |  |                |  |             |     |                   |       |             |   |         |          |         |  |                    |              |  |    |         |  |        |  
|Balance, December 31, 2007                                       |  | 14             |  | $           | 720 |                   | 7,703 |             | $ | 77      |          | 57,637  |  | (62,566            | )            |  |   |         |  | (4,132 | )
|                                                                 |  |                |  |             |     |                   |       |             |   |         |          |         |  |                    |              |  |    |         |  |        |  

See accompanying report of independent registered public accounting firm and notes to the
consolidated financial statements.



31



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|---------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ---- | --------------------------------- | ----- | ---- | ------------------------ | ------ | - |  | ----- | -
|                                                                                                                 |  | Year EndedDecember 31,2007 |        |      | Seven MonthsEndedDecember 31,2006 |       |      | Fiscal YearEnded May 31, |       
|                                                                                                                 |  |                            |        | 2006 |                                   |       | 2005 |                         
|Cash flows from operating activities:                                                                            |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Loss from continuing operations                                                                                  |  | $                          | (3,463 | )    |                                   | (916  | )    |                          | (181   | ) |  | (268  | )
|Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Depreciation and amortization                                                                                    |  |                            | 154    |      |                                   | 62    |      |                          | 87     |   |  | 96    |  
|Asset writedown  eye care memberships                                                                           |  |                            | 62     |      |                                   |      |      |                          | 63     |   |  |      |  
|Asset write-off                                                                                                  |  |                            | 3      |      |                                   |      |      |                          |       |   |  |      |  
|Loss on impairment  investment in marketable securities                                                         |  |                            |       |      |                                   |      |      |                          | 17     |   |  | 118   |  
|Loss from software development                                                                                   |  |                            |       |      |                                   |      |      |                          | 123    |   |  |      |  
|Gain from sale of available-for-sale securities                                                                  |  |                            | (29    | )    |                                   |      |      |                          |       |   |  |      |  
|Gain on sale of assets                                                                                           |  |                            | (3     | )    |                                   | (2    | )    |                          |       |   |  |      |  
|Gain from property insurance claim                                                                               |  |                            |       |      |                                   | (17   | )    |                          |       |   |  |      |  
|Amortization of deferred revenue                                                                                 |  |                            |       |      |                                   | (3    | )    |                          | (58    | ) |  | (75   | )
|Non cash expense  stock issued                                                                                  |  |                            | 29     |      |                                   | 22    |      |                          | 53     |   |  | 31    |  
|Compensation expense  stock options and warrants issued                                                         |  |                            | 90     |      |                                   | 57    |      |                          |       |   |  | 4     |  
|Changes in assets and liabilities:                                                                               |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Accounts receivable, net                                                                                         |  |                            | 128    |      |                                   | (10   | )    |                          | (40    | ) |  | 78    |  
|Accounts receivable  managed care reinsurance contract                                                          |  |                            |       |      |                                   |      |      |                          | 372    |   |  | 181   |  
|Other current assets, restricted cash, and other assets                                                          |  |                            | 388    |      |                                   | 279   |      |                          | (425   | ) |  | 9     |  
|Accounts payable and accrued liabilities                                                                         |  |                            | 734    |      |                                   | 2     |      |                          | (23    | ) |  | (377  | )
|Accrued claims payable                                                                                           |  |                            | 2,718  |      |                                   | (44   | )    |                          | (940   | ) |  | 83    |  
|Income taxes payable                                                                                             |  |                            | 44     |      |                                   | 2     |      |                          | 18     |   |  | 5     |  
|Accrued reinsurance claims payable                                                                               |  |                            | 10     |      |                                   | (10   | )    |                          | (665   | ) |  | 8     |  
|Other liabilities                                                                                                |  |                            | (39    | )    |                                   | 39    |      |                          |       |   |  |      |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Net cash provided by (used in) continuing operations                                                             |  |                            | 826    |      |                                   | (539  | )    |                          | (1,599 | ) |  | (107  | )
|Net cash used in discontinued operations                                                                         |  |                            | (20    | )    |                                   |      |      |                          | (55    | ) |  | (151  | )
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Net cash provided by (used in) continuing and discontinued operations                                            |  |                            | 806    |      |                                   | (539  | )    |                          | (1,654 | ) |  | (258  | )
|Cash flows from investing activities:                                                                            |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Net proceeds from sale of available-for-sale securities                                                          |  |                            | 30     |      |                                   |      |      |                          |       |   |  |      |  
|Net proceeds from sale of property and equipment                                                                 |  |                            | 3      |      |                                   | 2     |      |                          |       |   |  |      |  
|Proceeds from property insurance claim                                                                           |  |                            |       |      |                                   | 35    |      |                          |       |   |  |      |  
|Payment received on notes receivable                                                                             |  |                            | 25     |      |                                   | 10    |      |                          |       |   |  |      |  
|Additions to property and equipment, net                                                                         |  |                            | (58    | )    |                                   | (160  | )    |                          | (25    | ) |  | (45   | )
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Net cash used in investing activities                                                                            |  |                            |       |      |                                   | (113  | )    |                          | (25    | ) |  | (45   | )
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Cash flows from financing activities:                                                                            |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Proceeds from the issuance of common and preferred stock                                                         |  |                            | 19     |      |                                   | 785   |      |                          | 3,502  |   |  | 841   |  
|Repayment of other liabilities                                                                                   |  |                            | (55    | )    |                                   | (53   | )    |                          | (55    | ) |  | (52   | )
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Net cash (used in) provided by financing activities                                                              |  |                            | (36    | )    |                                   | 732   |      |                          | 3,447  |   |  | 789   |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Net increase in cash and cash equivalents                                                                        |  |                            | 770    |      |                                   | 80    |      |                          | 1,768  |   |  | 486   |  
|Cash and cash equivalents at beginning of period                                                                 |  |                            | 5,543  |      |                                   | 5,463 |      |                          | 3,695  |   |  | 3,209 |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Cash and cash equivalents at end of period                                                                       |  | $                          | 6,313  |      |                                   | 5,543 |      |                          | 5,463  |   |  | 3,695 |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Supplemental disclosures of cash flow information:                                                               |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Cash paid during the year for:                                                                                   |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Interest                                                                                                         |  | $                          | 190    |      |                                   | 98    |      |                          | 187    |   |  | 206   |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Income taxes                                                                                                     |  | $                          | 30     |      |                                   | 41    |      |                          | 60     |   |  | 48    |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Noncash financing and investing activities:                                                                      |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  
|Property acquired under capital leases                                                                           |  | $                          | 60     |      |                                   | 34    |      |                          | 131    |   |  | 43    |  
|                                                                                                                 |  |                            |        |      |                                   |       |      |                          |        |   |  |       |  

See accompanying report of independent registered public accounting firm and notes to the
consolidated financial statements.



32



---

##### Table of Contents

NOTE 1  DESCRIPTION OF THE COMPANYS BUSINESS AND BASIS OF
PRESENTATION

Comprehensive Care Corporation (the
Company or CompCare) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the Company include Comprehensive Behavioral Care, Inc. (CBC) and subsidiary
corporations. The Company, primarily through its wholly owned subsidiary, CBC, provides managed care services in the behavioral health and psychiatric fields, which is its only operating segment. We manage the delivery of a continuum of psychiatric
and substance abuse services to commercial, Medicare, Medicaid and CHIP members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare
services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications for a major Medicaid HMO in Indiana and Michigan. The managed care operations include administrative service agreements, fee-for-service
agreements, and capitation contracts. The customer base for its services includes both private and governmental entities. Our services are provided primarily by unrelated vendors on a subcontract basis.

Our Board of Directors approved on May 21, 2007 a change in the Companys fiscal year end from May 31 to December 31, effective
December 31, 2006. The purpose of the change is to align the Companys fiscal year end with that of Hythiam, which purchased a majority controlling interest in the Company through its purchase of Woodcliff in January 2007. In addition, a
calendar year end coincides with that of our major Indiana client that provided approximately 40.2% of our revenues during 2007. The seven months ended December 31, 2006 was our transition period for financial reporting purposes.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Comprehensive Care Corporation and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

USE OF
ESTIMATES

The preparation of the consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

REVENUE RECOGNITION

Our managed care activities are performed under the terms of agreements with health maintenance organizations, preferred provider organizations, and other health plans or payers to provide contracted behavioral healthcare services to
subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The
information regarding qualified participants is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy to determine the amount of revenue to be recognized. For the years ended
December 31, 2007 and 2006 (unaudited) such agreements accounted for 97.0%, or $36.3 million, and 96.1% (unaudited), or $18.3 million (unaudited), respectively. For the seven months ended December 31, 2006 such agreements accounted for
95.3%, or $9.8 million of revenue. For the fiscal years ended May 31, 2006 and 2005 such agreements accounted for 96.2%, or $23.0 million, and 90.2%, or $22.1 million, respectively. The remaining balance of our revenues is earned on a
fee-for-service basis and is recognized as services are rendered.

HEALTHCARE EXPENSE RECOGNITION

Healthcare operating expense is recognized in the period in which an eligible member actually receives services and includes an estimate of the cost of
behavioral health services that have been incurred but not yet reported. See Accrued Claims Payable for a discussion of claims incurred but not yet reported. We contract with various healthcare providers including hospitals, physician
groups and other licensed behavioral healthcare professionals either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required
billing elements correctly completed by the service provider. We then determine that the member is eligible to receive such services, the service provided is medically necessary and is covered by the benefit plans certificate of coverage, and
the service is authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment.



33



---

##### Table of Contents

PREMIUM DEFICIENCIES

We accrue losses under our capitated contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
We perform this loss accrual analysis on a specific contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contracts specific terms related to future
revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.

At any time prior to the end of a contract or contract renewal, if a capitated contract is not meeting its financial goals, we generally have the ability
to cancel the contract with 60 to 90 days written notice. Prior to cancellation, the Company will usually submit a request for a rate increase accompanied by supporting utilization data. Although our clients have historically been generally
receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the contract and limit our risk to a
short-term period.

On a quarterly basis, we perform a review of our portfolio of contracts for the purpose of identifying loss contracts
(as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide  Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. During the year ended December 31,
2007, we identified two contracts that were not meeting their financial goals. We successfully obtained a rate increase from one client effective January 1, 2008. We are negotiating and believe we will receive a rate increase from the other
client effective January 1, 2008, provided we comply with monthly performance measures we believe we will meet. The rate increase would amount to approximately $2 million per annum. At December 31, 2007, we believe no contract loss reserve
for future periods is necessary for these contracts.

CASH AND CASH EQUIVALENTS

At December 31, 2007, cash and cash equivalents consisted entirely of funds on deposit in savings and checking accounts at major financial
institutions. At December 31, 2006, cash in excess of daily requirements was invested in short-term, overnight investments. Such investments totaled $1.7 million and are included in cash and cash equivalents in the accompanying consolidated
balance sheets.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years. Leasehold
improvements are amortized over the shorter of the lease term or the assets useful life. Amortization of assets acquired under capital leases is included in depreciation expense. Depreciation and amortization expense was $154,000 for the year
ended December 31, 2007 and $62,000 for the seven months ended December 31, 2006. For the fiscal years ended May 31, 2006 and 2005, depreciation and amortization expense was $87,000 and $96,000, respectively.

GOODWILL

Goodwill represents the cost in
excess of the fair value of net assets acquired in purchase transactions. Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is periodically evaluated for impairment to carrying amount,
with decreases in carrying amount recognized immediately. We review goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The test for impairment of goodwill requires
us to make estimates about fair value, which are based on projected future cash flows. We performed an impairment test as of December 31, 2007 and 2006, and determined that no impairment of goodwill had occurred as of such dates.

ACCRUED CLAIMS PAYABLE

The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet
reported (IBNR) to us. The unpaid claims liability is estimated using an actuarial paid completion factor



34



---

##### Table of Contents

methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These
estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated accrued claims payable amount reported. Although considerable variability is inherent in such estimates,
management believes that the unpaid claims liability is adequate.

ACCRUED REINSURANCE CLAIMS
PAYABLE

The accrued reinsurance claims payable liability represents amounts payable to providers under a state reinsurance
program associated with our contract to provide behavioral healthcare services to members of a Connecticut HMO. Our contract with the HMO ended December 31, 2005.

INCOME TAXES

Under the asset and liability method of SFAS No. 109,
Accounting for Income Taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in the consolidated statements of operations in the period that included the enactment. A valuation allowance is
established for deferred tax assets unless their realization is considered more likely than not.

In June 2006, the FASB issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that companies recognize in the consolidated financial
statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007, the beginning of our 2007 fiscal year, with no impact on our
consolidated financial statements.

STOCK OPTIONS

We issue stock options to our employees and non-employee directors (optionees) allowing optionees to purchase our common stock pursuant to
shareholder approved stock option plans. Prior to June 1, 2006, as permitted by SFAS No. 148, Accounting for Stock-Based Compensation-Transitional Disclosure, we elected to follow Accounting Principles Board Opinion
No. 25, (APB 25) Accounting for Stock Issued to Employees and related interpretations in accounting for our employee stock options. Under APB 25, in the event that the exercise price of our employee stock options is less
than the market price of the underlying stock on the date of grant, compensation expense is recognized. Because all options granted under our employee stock option plans had an exercise price equal to the market value of the underlying common stock
on the date of grant, no stock-based employee compensation cost was reflected in net loss.

Effective June 1, 2006, we adopted SFAS
No. 123(R), Share-Based Payment, using the modified prospective method, which requires companies to measure compensation cost for stock options issued to employees or non-employee directors at fair value on the grant date and
recognize compensation cost over the service period for those options expected to vest. We use a Black-Scholes valuation model to determine the fair value of options on the grant date, which is the same model previously utilized for footnote
disclosures required under SFAS No. 148, Accounting for Stock-Based Compensation-Transitional Disclosure. The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition
provisions of SFAS No. 123R to stock-based employee compensation.



35



---

##### Table of Contents

|                                                                                                                                    |  |                                                |       |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                                    |  | Fiscal Year Ended May 31,                      |      
|                                                                                                                                    |  | 2006                                           |       |   | 2005 |  
|                                                                                                                                    |  | (in thousands except for per shareinformation) |      
|Net loss, as reported                                                                                                               |  | $                                              | (181  | ) |      | $ | (268  | )
|Deduct:                                                                                                                             |  |                                                |       |   |      |   |       |  
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                                | (212  | ) |      |   | (303  | )
|                                                                                                                                    |  |                                                |       |   |      |   |       |  
|Pro forma net loss                                                                                                                  |  | $                                              | (393  | ) |      | $ | (571  | )
|                                                                                                                                    |  |                                                |       |   |      |   |       |  
|Loss per common share:                                                                                                              |  |                                                |       |   |      |   |       |  
|Basic  as reported                                                                                                                 |  | $                                              | (0.03 | ) |      | $ | (0.05 | )
|                                                                                                                                    |  |                                                |       |   |      |   |       |  
|Basic  pro forma                                                                                                                   |  | $                                              | (0.07 | ) |      | $ | (0.12 | )
|                                                                                                                                    |  |                                                |       |   |      |   |       |  
|Diluted  as reported                                                                                                               |  | $                                              | (0.03 | ) |      | $ | (0.05 | )
|                                                                                                                                    |  |                                                |       |   |      |   |       |  
|Diluted  pro forma                                                                                                                 |  | $                                              | (0.07 | ) |      | $ | (0.12 | )
|                                                                                                                                    |  |                                                |       |   |      |   |       |  

The weighted average fair value of options granted in fiscal year 2006 and 2005 was $1.42 and
$0.93, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period.

PER SHARE DATA

In calculating basic loss per share, net loss is divided by the
weighted average number of common shares outstanding for the period. For the periods presented, diluted loss per share is equivalent to basic loss per share. The following table sets forth the computation of basic and diluted loss per share in
accordance with Statement No. 128, Earnings Per Share:



|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|------------------------------------------ | ---- | ---------------------------------------------------- | ------ | ---- | ------------------------------ | ----- | ---- | ------------------------- | ----- | ---- |  | ----- | -
|                                           |      | Year EndedDecember 31,                               |        |      | Seven Months EndedDecember 31, |       |      | Fiscal Year Ended May 31, |      
|                                           | 2007 |                                                      |        | 2006 |                                |       | 2006 |                           |       | 2005 | 
|                                           |      | (Amounts in thousands, except per share information) |       
|Numerator:                                 |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Loss from continuing operations            |      | $                                                    | (3,463 | )    |                                | (916  | )    |                           | (181  | )    |  | (268  | )
|Loss from discontinued operations          |      |                                                      |       |      |                                | (20   | )    |                           |      |      |  |      |  
|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Net loss - Common Stockholders             |      | $                                                    | (3,463 | )    |                                | (936  | )    |                           | (181  | )    |  | (268  | )
|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Denominator:                               |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Weighted average shares  basic            |      |                                                      | 7,697  |      |                                | 6,445 |      |                           | 5,808 |      |  | 4,935 |  
|Effect of dilutive securities:             |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Employee stock options                     |      |                                                      |       |      |                                |      |      |                           |      |      |  |      |  
|Warrants                                   |      |                                                      |       |      |                                |      |      |                           |      |      |  |      |  
|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Weighted average shares  diluted          |      |                                                      | 7,697  |      |                                | 6,445 |      |                           | 5,808 |      |  | 4,935 |  
|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Loss per common share  basic and diluted: |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Loss from continuing operations            |      | $                                                    | (0.45  | )    |                                | (0.14 | )    |                           | (0.03 | )    |  | (0.05 | )
|Loss from discontinued operations          |      |                                                      |       |      |                                | (0.01 | )    |                           |      |      |  |      |  
|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  
|Net loss                                   |      | $                                                    | (0.45  | )    |                                | (0.15 | )    |                           | (0.03 | )    |  | (0.05 | )
|                                           |      |                                                      |        |      |                                |       |      |                           |       |      |  |       |  



36



---

##### Table of Contents

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments requires disclosure of fair value
information about financial instruments for which it is practical to estimate that value.

For cash and cash equivalents, marketable
securities, restricted cash, and note receivable, the carrying amount approximates fair value. For long-term debt, the fair value is based on the estimated market price for the convertible debentures on the last day of the interim period and fiscal
year.

The carrying amounts and fair values of our financial instruments at December 31, 2007 and 2006 are as follows:



|                          |  |                        |       |                   |       |                |       |           |      
|------------------------- |  | ---------------------- | ----- | ----------------- | ----- | -------------- | ----- | --------- | -----
|                          |  | December 31, 2007      |       | December 31, 2006
|                          |  | CarryingAmount         |       | FairValue         |       | CarryingAmount |       | FairValue
|                          |  | (Amounts in thousands)
|Assets                    |  |                        |       |                   |       |                |       |           |      
|Cash and cash equivalents |  | $                      | 6,313 |                   | 6,313 |                | 5,543 |           | 5,543
|Marketable securities     |  |                        |      |                   |      |                | 1     |           | 1    
|Restricted cash           |  |                        | 1     |                   | 1     |                | 1     |           | 1    
|Note receivable           |  |                        | 44    |                   | 44    |                | 69    |           | 69   
|Liabilities               |  |                        |       |                   |       |                |       |           |      
|Long-term debt            |  | $                      | 2,244 |                   | 2,096 |                | 2,244 |           | 1,990

NOTE 3  LIQUIDITY

During the year ended December 31, 2007, our cash and cash equivalents increased by $770,000. Net cash provided by continuing operations amounted to
$826,000. Cash used in investing activities is comprised primarily of $58,000 in additions to property and equipment offset by $58,000 in proceeds from sales of available-for-sale securities, sales of equipment and payments received on notes
receivable. Cash used in financing activities consists primarily of $19,000 in net proceeds from the issuance of common stock less payment of other liabilities of $55,000. At December 31, 2007, cash and cash equivalents amounted to $6.3
million. We believe we have sufficient working capital to sustain current operations and meet our current obligations during the next twelve months.

NOTE 4  SOURCES OF REVENUE

Our revenue can be segregated
into the following significant categories (amounts in thousands):



|                        |  |                        |        |                               |   |                            |  |      |        |  |   |       
|----------------------- |  | ---------------------- | ------ | ----------------------------- | - | -------------------------- |  | ---- | ------ |  | - | ------
|                        |  | Year EndedDecember 31, |        | Seven MonthsEndedDecember 31, |   | Fiscal Years Ended May 31,
|                        |  | 2007                   |        | 2006                          |   | 2006                       |  | 2005
|Capitated contracts     |  | $                      | 36,295 |                               | $ | 9,829                      |  | $    | 23,044 |  | $ | 22,062
|Non-capitated contracts |  |                        | 1,105  |                               |   | 486                        |  |      | 912    |  |   | 2,411 
|                        |  |                        |        |                               |   |                            |  |      |        |  |   |       
|Total                   |  | $                      | 37,400 |                               | $ | 10,315                     |  | $    | 23,956 |  | $ | 24,473
|                        |  |                        |        |                               |   |                            |  |      |        |  |   |       

Capitated revenues include contracts under which we assume the financial risk for the costs of
member behavioral healthcare services in exchange for a fixed, per member per month fee. For non-capitated contracts, we may manage behavioral healthcare programs or perform various managed care functions, such as clinical care management, provider
network development, and claims processing without assuming financial risk for member behavioral healthcare costs.

NOTE 5 
MAJOR CONTRACTS/CUSTOMERS

(1) During our fiscal year ended May 31, 2006, we began providing
behavioral health services to the members of a Medicare Advantage HMO in the states of Maryland, Pennsylvania, and Texas. Revenues under the contracts accounted for $5.5 million, or 14.7%, and $2.0 million, or 19.6% of our revenues for the year
ended December 31, 2007 and the seven



37



---

##### Table of Contents

months ended December 31, 2006, respectively. We ceased providing services to the clients Texas membership as of December 31, 2006. The
contracts are for an initial one-year term with automatic annual renewals unless either party provides notice of cancellation at least 90 days prior to the expiration of the then current terms.

In January 2008, this client issued a RFP for management of behavioral healthcare services for its Pennsylvania, Maryland, and Texas regions. We submitted a bid to
retain our current business with this client as well as attempt to regain the Texas membership. Our client intends to select a finalist in March 2008 with an effective date of July 1, 2008 for a new agreement to serve members in these states.
We do not expect to be selected as a finalist and accordingly the majority of the revenues under this contract are expected to end during the third quarter of 2008.

(2) On January 1, 2007, we began providing behavioral healthcare services to approximately 250,000 Medicaid recipients in Indiana. The contract generated $15.0 million, or 40.2% of our revenues for the year ended
December 31, 2007, and is for an initial term of two years with subsequent extensions by mutual written agreement. Termination of the contract by either party may only be effected by reason of failure to perform that has not been corrected
within agreed upon timeframes.

(3) We currently furnish behavioral healthcare services to approximately 244,000 members of a health plan providing
Medicaid, Medicare, and CHIP benefits in Michigan, Texas and California. Services are provided on a fee-for-service and ASO basis. The contracts accounted for $4.3 million, or 11.6%, and $1.5 million, or 14.1%, of our revenues for the year ended
December 31, 2007 and the seven months ended December 31, 2006, respectively. The health plan has been a customer since June of 2002. The initial contract was for a one-year period and has been automatically renewed on an annual basis.
Termination by either party may occur with 90 days written notice to the other party.

In general, our contracts with our customers are typically for
initial one-year terms, with automatic annual extensions. Such contracts generally provide for cancellation by either party with 60 to 90 days written notice.

NOTE 6  ACCOUNTS RECEIVABLE

Accounts Receivable of $35,000 at
December 31, 2007 and $169,000 at December 31, 2006 consists of trade receivables resulting from services rendered under managed care capitation contracts. The following table summarizes changes in the Companys allowance for doubtful
accounts for the year ended December 31, 2007 and the seven months ended December 31, 2006:



|                                     |  |                        |   |                            |   |                  |    |   |                     |    |   |                   |  
|------------------------------------ |  | ---------------------- | - | -------------------------- | - | ---------------- | -- | - | ------------------- | -- | - | ----------------- | -
|                                     |  | BEGINNINGBALANCE       |   | ADDITIONSCHARGEDTO EXPENSE |   | DEDUCTIONS(a)(b) |    |   | WRITE-OFFOFACCOUNTS |    |   | BALANCEEND OFYEAR
|                                     |  | (Amounts in thousands)
|Year ended December 31, 2007         |  | $                      | 6 |                            | 6 |                  | (6 | ) |                     | (6 | ) |                   | 
|Seven months ended December 31, 2006 |  | $                      |  |                            | 6 |                  |   |   |                     |   |   |                   | 6



|(a) | Includes cash recoveries and reversals of reserves.
|--- | ---------------------------------------------------

|(b) | Excludes $4,000 at December 31, 2007, $153,000 at December 31, 2006, and $89,000 at May 31, 2006 of recoveries from accounts previously written off.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

Recoveries are reflected on our consolidated statements of operations as a reduction to the provision for doubtful accounts.



38



---

##### Table of Contents

NOTE 7  OTHER CURRENT ASSETS

Other current assets consist of the following:



|                                    |  |                        |     |                  |    
|----------------------------------- |  | ---------------------- | --- | ---------------- | ---
|                                    |  | December 31,2007       |     | December 31,2006
|                                    |  | (Amounts in thousands)
|Accounts receivable  other         |  | $                      | 32  |                  | 44 
|Restricted cash                     |  |                        | 1   |                  | 1  
|Receivable from insurance claim (1) |  |                        |    |                  | 250
|Deposits                            |  |                        |    |                  | 86 
|Prepaid insurance                   |  |                        | 160 |                  | 125
|Note receivable (2)                 |  |                        | 27  |                  | 25 
|Marketable securities               |  |                        |    |                  | 1  
|Other prepaid fees and expenses     |  |                        | 187 |                  | 261
|                                    |  |                        |     |                  |    
|Total other current assets          |  | $                      | 407 |                  | 793
|                                    |  |                        |     |                  |    



|(1) | Amount represents proceeds that were due the Company under a life insurance policy. We were entitled to the insurance benefits as the result of a settlement of our claims against
the seller of four corporations purchased in 1996. The proceeds were received in April 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the current portion of a promissory note received in July 2006 as settlement of a dispute between the Company and a software vendor that had been engaged to design, but
was unable to complete, a new managed care information system. The difference between the present value of the note and our investment of approximately $200,000 was recorded in the accompanying consolidated statement of operations as a loss
from software development. The current portion of the receivable is a component of other current assets while the non-current portion of approximately $17,000 appears as a note receivable in the accompanying consolidated balance sheet at
December 31, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 8  OTHER ASSETS

Other assets consist of the following:



|                                        |  |                        |     |                  |    
|--------------------------------------- |  | ---------------------- | --- | ---------------- | ---
|                                        |  | December 31,2007       |     | December 31,2006
|                                        |  | (Amounts in thousands)
|Deferred costs  eye care memberships   |  | $                      |    |                  | 62 
|Deferred costs  NCQA accreditation     |  |                        | 42  |                  | 32 
|Deferred costs  provider credentialing |  |                        | 90  |                  | 60 
|Deposits                                |  |                        | 4   |                  | 49 
|                                        |  |                        |     |                  |    
|Total other assets                      |  | $                      | 136 |                  | 203
|                                        |  |                        |     |                  |    

NOTE 9  PROPERTY AND EQUIPMENT,
NET

Property and equipment, net, consists of the following:



|                                               |  |                        |        |   |                  |        |  
|---------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | ------ | -
|                                               |  | December 31,2006       |        |   | December 31,2007 |       
|                                               |  | (Amounts in thousands) |       
|Furniture and equipment                        |  | $                      | 2,131  |   |                  | 2,294  |  
|Leasehold improvements                         |  |                        | 61     |   |                  | 65     |  
|Capitalized leases                             |  |                        | 282    |   |                  | 254    |  
|                                               |  |                        |        |   |                  |        |  
|                                               |  |                        | 2,474  |   |                  | 2,613  |  
|Less accumulated depreciation and amortization |  |                        | (2,141 | ) |                  | (2,236 | )
|                                               |  |                        |        |   |                  |        |  
|Total property and equipment, net              |  | $                      | 333    |   |                  | 377    |  
|                                               |  |                        |        |   |                  |        |  



39



---

##### Table of Contents

NOTE 10  ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES

Accounts payable and accrued liabilities consist of the following:



|                                                |  |                        |       |                  |      
|----------------------------------------------- |  | ---------------------- | ----- | ---------------- | -----
|                                                |  | December 31,2007       |       | December 31,2006
|                                                |  | (Amounts in thousands)
|Accounts payable                                |  | $                      | 360   |                  | 156  
|Accrued salaries and wages                      |  |                        | 685   |                  | 195  
|Accrued vacation                                |  |                        | 139   |                  | 102  
|Accrued legal and audit                         |  |                        | 207   |                  | 74   
|Short-term portion of capital lease obligations |  |                        | 54    |                  | 49   
|Other accrued liabilities                       |  |                        | 473   |                  | 625  
|                                                |  |                        |       |                  |      
|Total accounts payable and accrued liabilities  |  | $                      | 1,918 |                  | 1,201
|                                                |  |                        |       |                  |      

NOTE 11  CAPITAL LEASES

We use capital leases to finance the acquisition of certain computer and telephone equipment. Terms of the leases range from three to five years.



|                                                                       |  |                        |     |                  |   |    
|---------------------------------------------------------------------- |  | ---------------------- | --- | ---------------- | - | ---
|                                                                       |  | December 31,2007       |     | December 31,2006
|                                                                       |  | (Amounts in thousands)
|Classes of property:                                                   |  |                        |    
|Computer equipment                                                     |  | $                      | 138 |                  | $ | 110
|Telephone equipment                                                    |  |                        | 144 |                  |   | 144
|                                                                       |  |                        |     |                  |   |    
|Total equipment cost                                                   |  |                        | 282 |                  |   | 254
|Less: accumulated depreciation                                         |  |                        | 126 |                  |   | 94 
|                                                                       |  |                        |     |                  |   |    
|Net book value                                                         |  | $                      | 156 |                  | $ | 160
|                                                                       |  |                        |     |                  |   |    
|                                                                      
|Future minimum lease payments under the capital leases are as follows:
|                                                                       |  |                       
|Year ended December 31, 2008                                           |  | $                      | 68  |                  |   |    
|Year ended December 31, 2009                                           |  |                        | 66  |                  |   |    
|Year ended December 31, 2010                                           |  |                        | 44  |                  |   |    
|Year ended December 31, 2011                                           |  |                        | 21  |                  |   |    
|                                                                       |  |                        |     |                  |   |    
|Total minimum lease payments                                           |  |                        | 199 |                  |   |    
|Less: amount representing interest                                     |  |                        | 28  |                  |   |    
|                                                                       |  |                        |     |                  |   |    
|Total obligations under capital leases                                 |  |                        | 171 |                  |   |    
|Less: current installments of capital lease obligations                |  |                        | 53  |                  |   |    
|                                                                       |  |                        |     |                  |   |    
|Longterm obligation under capital leases                              |  | $                      | 118 |                  |   |    
|                                                                       |  |                        |     |                  |   |    

NOTE 12  LONG-TERM DEBT

Long-term debt consists of the following:



|                                                                                                                 |  |                        |       |                  |      
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---------------- | -----
|                                                                                                                 |  | December 31,2007       |       | December 31,2006
|                                                                                                                 |  | (Amounts in thousands)
|7 1/2% convertible subordinated debentures due April, 2010, interest payable
semi-annually in April and October* |  | $                      | 2,244 |                  | 2,244
|                                                                                                                 |  |                        |       |                  |      



|* | At December 31, 2007, the debentures are convertible into 15,051 shares of common stock at a conversion price of $149.09 per share.
|- | -----------------------------------------------------------------------------------------------------------------------------------



40



---

##### Table of Contents

NOTE 13  INCOME TAXES

Provision for income taxes consists of the following (amounts in thousands):



|                           |      |                        |      |                               |      |                           |      |  |   
|-------------------------- | ---- | ---------------------- | ---- | ----------------------------- | ---- | ------------------------- | ---- |  | --
|                           |      | Year EndedDecember 31, |      | Seven MonthsEndedDecember 31, |      | Fiscal Year Ended May 31,
|                           | 2007 |                        | 2006 |                               | 2006 |                           | 2005
|Current:                   |      |                        |      |                               |      |                           |      |  |   
|Federal                    |      | $                      |     |                               |     |                           |     |  |  
|State                      |      |                        | 72   |                               | 43   |                           | 78   |  | 52
|                           |      |                        |      |                               |      |                           |      |  |   
|Provision for income taxes |      | $                      | 72   |                               | 43   |                           | 78   |  | 52
|                           |      |                        |      |                               |      |                           |      |  |   

Reconciliation between the provision for income tax and the amount computed by applying the
statutory Federal income tax rate (34%) to loss before income tax is as follows (amounts in thousands):



|                                                              |      |                        |        |      |                               |      |      |                           |     |      |  |     |  
|------------------------------------------------------------- | ---- | ---------------------- | ------ | ---- | ----------------------------- | ---- | ---- | ------------------------- | --- | ---- |  | --- | -
|                                                              |      | Year EndedDecember 31, |        |      | Seven MonthsEndedDecember 31, |      |      | Fiscal Year Ended May 31, |    
|                                                              | 2007 |                        |        | 2006 |                               |      | 2006 |                           |     | 2005 | 
|Income tax benefit at the statutory tax rate                  |      | $                      | (1,153 | )    |                               | (303 | )    |                           | (35 | )    |  | (73 | )
|State income tax (benefit) expense, net of federal tax effect |      |                        | (51    | )    |                               | 4    |      |                           | 74  |      |  | (8  | )
|Change in valuation allowance                                 |      |                        | 1,218  |      |                               | 351  |      |                           | (16 | )    |  |    |  
|Non-deductible items                                          |      |                        | 48     |      |                               | (3   | )    |                           | 38  |      |  | 37  |  
|Benefit of net operating loss carryforward not recognized     |      |                        |       |      |                               |     |      |                           |    |      |  | 96  |  
|Other                                                         |      |                        | 10     |      |                               | (6   | )    |                           | 17  |      |  |    |  
|                                                              |      |                        |        |      |                               |      |      |                           |     |      |  |     |  
|                                                              |      | $                      | 72     |      |                               | 43   |      |                           | 78  |      |  | 52  |  
|                                                              |      |                        |        |      |                               |      |      |                           |     |      |  |     |  

Significant components of our deferred income taxes are as follows:



|                                                         |  |                        |        |   |                  |        |   |             |        |  
|-------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | ------ | - | ----------- | ------ | -
|                                                         |  | December 31,2007       |        |   | December 31,2006 |        |   | May 31,2006 |       
|                                                         |  | (Amounts in thousands) |       
|Deferred Tax Assets:                                     |  |                        |        |   |                  |        |   |             |        |  
|Net operating loss carryforwards                         |  | $                      | 2,917  |   |                  | 1,686  |   |             | 1,418  |  
|Accrued expenses                                         |  |                        | 124    |   |                  | 102    |   |             | 50     |  
|Loss on impairment - investment in marketable securities |  |                        | 40     |   |                  | 51     |   |             | 51     |  
|Employee benefits                                        |  |                        | 53     |   |                  | 39     |   |             | 38     |  
|Other, net                                               |  |                        | 93     |   |                  | 114    |   |             | 74     |  
|                                                         |  |                        |        |   |                  |        |   |             |        |  
|Total Deferred Tax Assets                                |  |                        | 3,227  |   |                  | 1,992  |   |             | 1,631  |  
|Valuation Allowance                                      |  |                        | (3,096 | ) |                  | (1,878 | ) |             | (1,527 | )
|                                                         |  |                        |        |   |                  |        |   |             |        |  
|Net Deferred Tax Assets                                  |  |                        | 131    |   |                  | 114    |   |             | 104    |  
|Deferred Tax Liabilities:                                |  |                        |        |   |                  |        |   |             |        |  
|Goodwill amortization                                    |  |                        | (131   | ) |                  | (114   | ) |             | (104   | )
|                                                         |  |                        |        |   |                  |        |   |             |        |  
|Net Deferred Tax                                         |  | $                      |       |   |                  |       |   |             |       |  
|                                                         |  |                        |        |   |                  |        |   |             |        |  



41



---

##### Table of Contents

In June 2005, we completed a private placement transaction that constituted a change of
ownership under IRS Section 382 rules, which impose limitations on the ability to deduct prior period net operating losses on current federal tax returns. As a result, our ability to use our net operating losses incurred prior to
June 14, 2005 is limited to approximately $400,000 per year.

On January 12, 2007, the sale of Woodcliffs majority interest
in the Company to Hythiam constituted another change of ownership under IRS Section 382 rules. In the event that the Company has two or more ownership changes, Section 1.382-5(d) also describes a potential impact on the
limitation for any losses attributable to the period preceding the earlier ownership change. We have determined that the latest change of ownership does not change the limitation of approximately $400,000 per year for net operating losses incurred
prior to June 14, 2005, the date of the first change in control. Furthermore, our ability to use net operating losses incurred between June 15, 2005 and January 12, 2007 is limited to approximately $490,000 per year. Net operating
losses for periods prior to June 15, 2005 and for the subsequent period of June 15, 2005 to January 12, 2007 may be deducted simultaneously subject to the applicable limitations. Any unused portion of such limitations can be carried
forward to the following year. We may be subject to further limitation in the event that we issue or agree to issue substantial amounts of additional equity.

At December 31, 2007, the Companys federal net operating loss carryforwards total approximately $7.7 million, of which $3.2 million is not subject to Section 382 limitation. These losses were incurred
in the years ended May 31, 2002 through December 31, 2007, and expire in years 2022 through 2027. The Company may be unable to utilize some or all of its allowable tax deductions or losses, depending upon factors including the availability
of sufficient taxable income from which to deduct such losses during limited carryover periods.

In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that companies recognize in the consolidated financial
statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The provisions of FIN 48 are effective for years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007 with no impact on our consolidated financial statements. The Company and
its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax years that remain subject to examinations by tax authorities are 2005, 2004, and 2003.

After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2007 and
2006 was necessary to fully offset the deferred tax assets based on the likelihood of future realization.

NOTE 14 
EMPLOYEE BENEFIT PLAN

We offer a 401(k) Plan (the Plan), which is a defined
contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of our eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed one thousand hours of service are
eligible to participate in the Plan. Each participant may contribute from 2% to 50% of his or her compensation to the Plan up to the annual maximum allowed amount, which was $15,500 during Calendar 2007, subject to limitations on the highly
compensated employees to ensure the Plan is non-discriminatory. Company contributions are discretionary and are determined by the Companys management. Our employer matching contributions were $8,906 to the Plan in 2007. We did not make a
matching contribution during the seven months ended December 31, 2006 or during the 2006 and 2005 fiscal years.

NOTE 15 
PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS

Preferred Stock

As of December 31, 2007, there were 4,340 remaining shares of preferred stock
authorized and available to issue, and 14,400 outstanding shares of Series A Preferred Stock. All outstanding shares were issued in June 2005 as a result of the sale of Series A Preferred Stock to Woodcliff for approximately $3.4 million in net cash
proceeds. The Series A Preferred Stock, acquired by Hythiam in January 2007, is convertible into 4,235,328 shares of common stock at a conversion rate of 294.12 common shares for each preferred share. Hythiam has the right to designate the majority
of our Board of Directors, has dividend and liquidation preferences, and anti-dilution protection. In addition, we need Hythiams consent for a sale or merger involving a material portion of our assets or business, any single or series of
related transactions exceeding $500,000, and prior to incurring any debt in excess of $200,000.



42



---

##### Table of Contents

We are authorized to issue shares of Preferred Stock, $50.00 par value, in one or more series, each
series to have such designation and number of shares as the Board of Directors may fix prior to the issuance of any shares of such series. Each series may have such preferences and relative participation, optional or special rights with such
qualifications, limitations or restrictions stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by the Board of Directors prior to the issuance of any such series.

Common Stock

Authorized shares of common stock
reserved for possible issuance for convertible debentures, convertible preferred stock, stock options, and warrants are as follows at December 31, 2007:



|                                                  |  |          
|------------------------------------------------- |  | ---------
|Convertible debentures(a)                         |  | 15,051   
|Convertible preferred stock(b)                    |  | 4,235,328
|Outstanding stock options(c)                      |  | 1,070,375
|Outstanding warrants(d)                           |  | 406,000  
|Possible future issuance under stock option plans |  | 1,276,668
|                                                  |  |          
|Total                                             |  | 7,003,422
|                                                  |  |          



|(a) | The debentures are convertible into 15,051 shares of common
stock at a conversion price of $149.09 per share.
|--- | -------------------------------------------------------------------------------------------------------------

|(b) | The Series A Convertible Preferred Stock is convertible into
4,235,328 shares of common stock at a conversion rate of 294.12 common shares for each preferred share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Options to purchase our common stock have been issued to
employees and non-employee Board of Director members with exercise prices ranging from $.25 to $4.00.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Warrants to purchase our common stock have been issued to
certain individuals or vendors in exchange for consulting services. All such warrants were issued in lieu of cash compensation and have five-year terms with exercise prices ranging from $1.09 to $5.00.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Option Plans

We issue stock options to our
employees and non-employee directors (optionees) allowing optionees to purchase our common stock pursuant to shareholder-approved stock option plans. We currently have two active incentive plans, the 1995 Incentive Plan and the 2002
Incentive Plan (collectively, the Plans), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock grants to eligible employees and consultants. Grants issued
under the Plans may qualify as incentive stock options (ISOs) under Section 422A of the Internal Revenue Code. Options for ISOs may be granted for terms of up to ten years and are generally exercisable in cumulative increments of
50% each six months. The exercise price for ISOs must equal or exceed the fair market value of the shares on the date of grant. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The
maximum number of shares authorized for issuance is 1,000,000 under the 2002 Incentive Plan and 1,000,000 under the 1995 Incentive Plan. As of December 31, 2007, under the 2002 Incentive Plan, there were 500,000 options available for grant and
460,000 options outstanding, of which 440,000 were exercisable. Additionally, as of December 31, 2007, under the 1995 Incentive Plan, there were 485,375 options outstanding and exercisable. There are no further options available for grant under
the 1995 Incentive Plan.

We also have a non-qualified stock option plan for our non-employee directors. Each non-qualified stock option is
exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options vest in
accordance with vesting schedules established by our Board of Directors Compensation and Stock Option Committee. Upon joining the Board, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on
the date of the Companys annual meeting. As of December 31, 2007, under the directors plan, there were 776,668 shares available for option grants and 125,000 options outstanding, of which none were exercisable.



43



---

##### Table of Contents

A summary of activity for the year ended December 31, 2007 is as follows:



|                                 |  |           |   |  |                               |      |                                           |      |                          |   |  
|-------------------------------- |  | --------- | - |  | ----------------------------- | ---- | ----------------------------------------- | ---- | ------------------------ | - | -
|Options                          |  | Shares    |   |  | Weighted-AverageExercisePrice |      | Weighted-AverageRemainingContractual Term |      | AggregateIntrinsic Value
|Outstanding at December 31, 2006 |  | 1,308,707 |   |  | $                             | 1.41 |                                           |      |                          |   |  
|Granted                          |  | 145,000   |   |  |                               | 1.05 |                                           |      |                          |   |  
|Exercised                        |  | (37,500   | ) |  |                               | 0.51 |                                           |      |                          |   |  
|Forfeited or expired             |  | (345,832  | ) |  |                               | 1.82 |                                           |      |                          |   |  
|                                 |  |           |   |  |                               |      |                                           |      |                          |   |  
|Outstanding at December 31, 2007 |  | 1,070,375 |   |  | $                             | 1.27 |                                           | 4.91 |                          | $ | 
|                                 |  |           |   |  |                               |      |                                           |      |                          |   |  
|Exercisable at December 31, 2007 |  | 925,375   |   |  | $                             | 1.30 |                                           | 4.19 |                          | $ | 

The following table summarizes information about options granted, exercised, and vested for the
years ended December 31, 2007 and 2006 (unaudited), the seven months ended December 31, 2006 and for the fiscal years ended May 31, 2006 and 2005.



|                                           |  |                        |         |                               |   |                           |  |      |         |      |   |         |  |   |        
|------------------------------------------ |  | ---------------------- | ------- | ----------------------------- | - | ------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                           |  | Year EndedDecember 31, |         | Seven MonthsEndedDecember 31, |   | Fiscal Year Ended May 31,
|                                           |  | 2007                   |         | 2006                          |   | 2006                      |  | 2006 |         | 2005
|                                           |  |                        |         | (unaudited)                   |   |                           |  |      |         |     
|Options granted                            |  |                        | 145,000 |                               |   | 250,000                   |  |      | 125,000 |      |   | 314,666 |  |   | 250,866
|Weighted-average grant-date fair value     |  | $                      | 0.76    |                               | $ | 1.37                      |  | $    | 1.31    |      | $ | 1.42    |  | $ | 0.93   
|Options exercised                          |  |                        | 37,500  |                               |   | 26,333                    |  |      |        |      |   | 282,166 |  |   | 116,500
|Total intrinsic value of exercised options |  | $                      | 13,160  |                               | $ | 35,922                    |  |      |        |      | $ | 411,009 |  | $ | 91,166 
|Fair value of vested options               |  | $                      | 78,346  |                               | $ | 204,218                   |  | $    | 59,268  |      | $ | 187,033 |  | $ | 324,237

Stock options were granted to Board of Director members and certain employees during the years
ended December 31, 2007 and 2006 (unaudited), the seven months ended December 31, 2006 and fiscal years ended May 31, 2006 and 2005. Options exercised during the years ended December 31, 2007 and 2006 (unaudited), the seven
months ended December 31, 2006 and fiscal years ended May 31, 2006 and 2005 were 37,500, 26,333(unaudited), 0, 282,166 and 116,500 respectively. Total intrinsic value of exercised options during the years ended December 31, 2007 and
2006, the seven months ended December 31, 2006 and fiscal years ended May 31, 2006 and 2005 was $13,160, $35,922 (unaudited), $0, $411,009 and $91,166 respectively. During the year ended December 31, 2007, 123,332 stock options
expired unexercised. These options had been granted to directors and one officer.

At December 31, 2007, there was approximately
$59,274 of total unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of approximately 6 months. Total recognized compensation costs during the year ended December 31,
2007 were $89,763. No compensation cost related to employees was recognized prior to June 1, 2006. We recognized approximately $8,607 of tax benefits attributable to stock-based compensation expense recorded during the year ended
December 31, 2007. This benefit was fully offset by a valuation allowance of the same amount due to the likelihood of future realization.

The following table lists the assumptions utilized in applying the Black-Scholes valuation model. We use historical data and management judgment to estimate the expected term of the option. Expected volatility is based on the historical
volatility of our traded stock. We have not declared dividends in the past nor do we expect to do so in the near future, and as such we assume no expected dividend. The risk-free rate is based on the U.S. Treasury yield curve with the same expected
term as that of the option at the time of grant.



44



---

##### Table of Contents

|                                                                             |  |                        |   |  |                               |   |  |                           |   |  |      |  
|---------------------------------------------------------------------------- |  | ---------------------- | - |  | ----------------------------- | - |  | ------------------------- | - |  | ---- | -
|                                                                             |  | Year EndedDecember 31, |   |  | Seven MonthsEndedDecember 31, |   |  | Fiscal Year Ended May 31, |  
|                                                                             |  | 2007                   |   |  | 2006                          |   |  | 2006                      |   |  | 2005 |  
|Volatility factor of the expected market price of the Companys common stock |  | 110.0                  | % |  | 93.0                          | % |  | 100.8                     | % |  | 95.0 | %
|Expected life (in years) of the options                                      |  | 3                      |   |  | 5                             |   |  | 5                         |   |  | 5    |  
|Risk-free interest rate                                                      |  | 4.8                    | % |  | 4.6                           | % |  | 4.5                       | % |  | 3.9  | %
|Dividend yield                                                               |  | 0                      | % |  | 0                             | % |  | 0                         | % |  | 0    | %

A summary of our stock option activity and related information for the fiscal years ended May 31, 2005 and
2006, the seven months ended December 31, 2006, and the year ended December 31, 2007 is as follows:



|                                    |  |           |   |  |                               |     
|----------------------------------- |  | --------- | - |  | ----------------------------- | ----
|                                    |  | Shares    |   |  | WeightedAverageExercise Price
|Outstanding as of May 31, 2004      |  | 1,229,390 |   |  | $                             | 1.00
|                                    |  |           |   |  |                               |     
|Granted                             |  | 250,866   |   |  |                               | 1.25
|Exercised                           |  | (116,500  | ) |  |                               | 0.55
|Forfeited                           |  | (19,800   | ) |  |                               | 1.97
|                                    |  |           |   |  |                               |     
|Outstanding as of May 31, 2005      |  | 1,343,956 |   |  | $                             | 1.08
|                                    |  |           |   |  |                               |     
|Granted                             |  | 314,666   |   |  |                               | 1.82
|Exercised                           |  | (282,166  | ) |  |                               | 0.47
|Forfeited                           |  | (190,049  | ) |  |                               | 1.41
|                                    |  |           |   |  |                               |     
|Outstanding as of May 31, 2006      |  | 1,186,407 |   |  | $                             | 1.36
|                                    |  |           |   |  |                               |     
|Granted                             |  | 125,000   |   |  |                               | 1.88
|Exercised                           |  |          |   |  |                               |    
|Forfeited                           |  | (2,700    | ) |  |                               | 1.15
|                                    |  |           |   |  |                               |     
|Outstanding as of December 31, 2006 |  | 1,308,707 |   |  | $                             | 1.41
|                                    |  |           |   |  |                               |     
|Granted                             |  | 145,000   |   |  |                               | 1.05
|Exercised                           |  | (37,500   | ) |  |                               | 0.51
|Forfeited                           |  | (345,832  | ) |  |                               | 1.82
|                                    |  |           |   |  |                               |     
|Outstanding as of December 31, 2007 |  | 1,070,375 |   |  | $                             | 1.27
|                                    |  |           |   |  |                               |     

A summary of options outstanding and exercisable as of December 31, 2007 is as follows:



|                    |  |                    |                 |                               |   |                                          |  |                    |  |                                                     |  |   |     
|------------------- |  | ------------------ | --------------- | ----------------------------- | - | ---------------------------------------- |  | ------------------ |  | --------------------------------------------------- |  | - | ----
|Options Outstanding |  | ExercisePriceRange |                 | Weighted-AverageExercisePrice |   | Weighted-AverageRemainingContractualLife |  | OptionsExercisable |  | Weighted-AverageExercise Price ofExercisableOptions
|182,000             |  | $                  | 0.25 - $ 0.2656 |                               | $ | 0.26                                     |  | 2.59               |  | 182,000                                             |  | $ | 0.26
|260,750             |  | $                  | 0.39 - $ 0.5625 |                               | $ | 0.54                                     |  | 2.47               |  | 260,750                                             |  | $ | 0.54
|189,500             |  | $                  | 0.78 - $ 1.12   |                               | $ | 1.07                                     |  | 8.90               |  | 44,500                                              |  | $ | 1.10
|247,000             |  | $                  | 1.40 - $ 1.78   |                               | $ | 1.62                                     |  | 6.76               |  | 247,000                                             |  | $ | 1.62
|94,500              |  | $                  | 1.80 - $ 2.16   |                               | $ | 1.95                                     |  | 7.40               |  | 94,500                                              |  | $ | 1.95
|96,625              |  | $                  | 3.5625 - $ 4.00 |                               | $ | 3.95                                     |  | 0.95               |  | 96,625                                              |  | $ | 3.95
|                    |  |                    |                 |                               |   |                                          |  |                    |  |                                                     |  |   |     
|1,070,375           |  | $                  | 0.25 - $4.00    |                               | $ | 1.27                                     |  | 4.91               |  | 925,375                                             |  | $ | 1.30
|                    |  |                    |                 |                               |   |                                          |  |                    |  |                                                     |  |   |     



45



---

##### Table of Contents

Warrants

We periodically issue warrants to purchase common stock as compensation for the services of consultants and marketing employees. Of the 406,000 warrants outstanding at December 31, 2007, 306,000 were issued to
two consultants and two employees as compensation for introducing strategic business partners to the Company. Such partners were responsible for the infusion of approximately $776,000 in cash to the Company in February and March 2005 in a private
placement of our common stock. All such warrants have five-year terms. Valuation using the Black-Scholes pricing model for the warrants issued in February and March 2005 was based on the following information:



|                                                                             |  |   |         |  
|---------------------------------------------------------------------------- |  | - | ------- | -
|Number of warrants                                                           |  |   | 306,000 |  
|Exercise price                                                               |  | $ | 1.25    |  
|Volatility factor of the expected market price of the Companys common stock |  |   | 95.0    | %
|Expected life of the warrants                                                |  |   | 3 years |  
|Risk-free interest rate                                                      |  |   | 3.9     | %
|Dividend yield                                                               |  |   | 0.0     | %
|Warrant valuation (in thousands)                                             |  | $ | 234     |  

No warrants were issued during the year ended December 31, 2007, the seven months ended
December 31, 2006, or the fiscal year ended May 31, 2006.

NOTE 16  COMMITMENTS AND
CONTINGENCIES

Lease Commitments

We lease certain office space and equipment. The Texas office lease contains escalation clauses based on the Consumer Price Index and provisions for payment of real estate taxes, insurance, and maintenance and repair
expenses. Total rental expense for all operating leases was $269,000 for the year ended December 31, 2007. For the seven months ended December 31, 2006 total rental expense was $210,000. For the fiscal years ended May 31, 2006 and
2005, total rental expense was $0.5 million and $0.6 million, respectively.

Future minimum payments, by year and in the aggregate, under
non-cancelable operating leases with initial or remaining terms of one year or more, consist of the following at December 31, 2007:



|                             |  |                        |    
|---------------------------- |  | ---------------------- | ---
|Calendar Year                |  | Operating Leases      
|                             |  | (Amounts in thousands)
|2008                         |  | $                      | 300
|2009                         |  |                        | 22 
|2010                         |  |                        | 22 
|2011                         |  |                        | 22 
|2012                         |  |                        | 10 
|                             |  |                        |    
|Total minimum lease payments |  | $                      | 376
|                             |  |                        |    

The above does not include rent payments related to our use of space within the offices of our
major Indiana client, which is not subject to a written lease agreement.

Other Commitments and Contingencies



|(1) | We provided behavioral healthcare services to the members of a Connecticut HMO from 2001 to 2005 under a contract that provided that we would also receive funds directly from a
state reinsurance program for the purpose of paying providers. At December 31, 2007, $2.5 million of reinsurance claims payable remains and is attributable to providers having submitted claims for authorized services having incorrect service
codes or otherwise incorrect information that has caused payment to be denied by us. In such cases, there are statutory provisions that allow the provider to appeal a denied claim. If no appeal is received by the Company within the prescribed amount
of time, it is probable that we will be required to remit the reinsurance funds back to the appropriate party.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46



---

##### Table of Contents

|(2) | In connection with our Indiana contract that started January 1, 2007, we are required to maintain a performance bond in the amount of $1,000,000. In addition, a $25,000
performance bond is maintained in relation to a Third Party Administrator license in Maryland.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Related to our discontinued hospital operations, Medicare guidelines allow the Medicare fiscal intermediary to re-open previously filed cost reports. Our fiscal 1999 cost report,
the final year we were required to file a cost report, is being reviewed, in which case the intermediary may determine that additional amounts are due to or from Medicare. Management believes cost reports for fiscal years prior to fiscal 1999 are
closed and considered final.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | We have insurance for a broad range of risks as it relates to our business operations. We maintain managed care errors and omissions, professional and general liability coverage.
These policies are written on a claims-made basis and are subject to a $10,000 per claim self-insured retention. The managed care errors and omissions and professional liability policies include limits of liability of $1 million per claim and $3
million in the aggregate. The general liability has a limit of liability of $5 million per claim and $5 million in the aggregate. We are responsible for claims within the self-insured retentions or if the policy limits are exceeded. Management is
not aware of any claims that could have a material adverse impact on our consolidated financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Two class action lawsuits and a complaint have been filed against us in the Delaware Court of Chancery. Until the actions are withdrawn or settled, we may incur further legal
defense fees and may be subject to awards of plaintiffs attorney fees or other fees, the amounts of which are not estimable. See Part I, Item 3, Legal Proceedings for a description of these matters.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Relating to our major Indiana contract, we have become aware that the state of Indiana is considering requiring payment of a claims billing code that we had previously been
instructed to deny. If the state of Indiana implements the payment requirement, the claims represented by these billing codes would be paid retroactively to January 1, 2007. Although we do not believe we have a contractual obligation to pay for
this code, it is possible that we may be responsible for these payments, which in our estimation could approximate $350,000. We believe that the state of Indiana will make a final determination by mid April 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 17  RELATED PARTY TRANSACTIONS

In August 2005, our principal operating subsidiary, CBC, entered into a marketing agreement with Health Alliance Network, Inc. (HAN) whereby
CBC appointed HAN as its primary representative and marketing agent for commercial business. Two shareholders of HAN held membership interests in Woodcliff, the owner of a controlling interest us. On January 12, 2007, the members of Woodcliff
sold 100% of their outstanding membership interests in Woodcliff to Hythiam. For the years ended December 31, 2007 and 2006 (unaudited), CBC paid HAN $60,000 and $85,500 (unaudited), respectively, under this agreement.

In February 2006, CBC entered into an agreement with Hythiam whereby we would have the exclusive right to market Hythiams substance abuse disease
management program to CBCs current and certain mutually agreed upon prospective clients. The program is an integrated disease management approach designed to offer less restrictive levels of care in order to minimize repeat detoxifications.
Under the agreement, CBC will pay Hythiam license and service fees for each enrollee who is treated. As of December 31, 2007, there had been no material transactions resulting from this agreement.

During 2007, CBC contracted with Integra Health Management, Inc. (IHM), a company that provides behavioral and medical health management and
consultative services to healthcare payers. IHM was founded by one of our directors, Michael Yuhas, who also serves as its current Chief Executive Officer. During the year ended December 31, 2007, CBC paid IHM $28,212 for monitoring and care
coordination of intensive case management patients. In addition, IHM provided $15,000 of information technology consulting services to CBC.

We have accelerated our Sarbanes-Oxley Act compliance efforts in order to meet management attestation requirements for financial reporting internal controls as of December 31, 2007. Hythiam has paid for consulting services to
accomplish our management review of such internal controls. Because this effort has benefited us, we will reimburse Hythiam a portion of the cost. In addition, we have benefited by being included under certain of Hythiams insurance policies.
At December 31, 2007, $80,000 is included in accounts payable and accrued liabilities to cover expected reimbursements to Hythiam for these costs.



47



---

##### Table of Contents

NOTE 18  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)



|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|------------------------------------------------------------ |  | --------------------------------------------- | ----- | --- | ------- | ------ | - | ------- | ----- | --- | -------- | ----- | - | ----- | ------ | -
|                                                             |  | Quarter Ended                                 |       |     | Year    |       
|CALENDAR 2007                                                |  | 3/31/07                                       |       |     | 6/30/07 |        |   | 9/30/07 |       |     | 12/31/07 |       |   | Total |       
|                                                             |  | (Amounts in thousands, except per share data) |      
|Operating revenues                                           |  | $                                             | 8,701 |     |         | 9,159  |   |         | 9,760 |     |          | 9,780 |   |       | 37,400 |  
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Gross profit                                                 |  |                                               | 438   |     |         | (189   | ) |         | 386   |     |          | (25   | ) |       | 610    |  
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|General and administrative expenses                          |  |                                               | 1,081 | (a) |         | 931    |   |         | 1,201 | (b) |          | 819   |   |       | 4,032  |  
|(Recovery of) provision for doubtful accounts                |  |                                               | (10   | )   |         | 2      |   |         | 4     |     |          |      |   |       | (4     | )
|Depreciation and amortization                                |  |                                               | 38    |     |         | 38     |   |         | 38    |     |          | 40    |   |       | 154    |  
|Other expense (income)                                       |  |                                               | 23    |     |         | (29    | ) |         | 1     |     |          | (176  | ) |       | (181   | )
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Income (loss) from continuing operations before income taxes |  |                                               | (694  | )   |         | (1,131 | ) |         | (858  | )   |          | (708  | ) |       | (3,391 | )
|Income tax expense                                           |  |                                               | 10    |     |         | 14     |   |         | 15    |     |          | 33    |   |       | 72     |  
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Net income (loss) from continuing operations                 |  |                                               | (704  | )   |         | (1,145 | ) |         | (873  | )   |          | (741  | ) |       | (3,463 | )
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Basic income (loss) per common share                         |  | $                                             | (0.09 | )   |         | (0.15  | ) |         | (0.11 | )   |          | (0.10 | ) |       | (0.45  | )
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Diluted income (loss) per common share                       |  | $                                             | (0.09 | )   |         | (0.15  | ) |         | (0.11 | )   |          | (0.10 | ) |       | (0.45  | )
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Weighted Average Common Shares Outstanding  basic           |  |                                               | 7,681 |     |         | 7,703  |   |         | 7,703 |     |          | 7,703 |   |       | 7,697  |  
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  
|Weighted Average Common Shares Outstanding  diluted         |  |                                               | 7,681 |     |         | 7,703  |   |         | 7,703 |     |          | 7,703 |   |       | 7,697  |  
|                                                             |  |                                               |       |     |         |        |   |         |       |     |          |       |   |       |        |  



|(a) | Includes $418,000 of expenses related to the proposed merger with Hythiam.
|--- | --------------------------------------------------------------------------

|(b) | Includes $ 416,000 of severance benefits due the Companys CEO.
|--- | ---------------------------------------------------------------



|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|--------------------------------------------------------- |  | --------------------------------------------- | ----- | ---- | -------------------- | ----- | ---- | ------------------ | ----- | - | ---------------- | ------ | -
|PERIOD JUNE 1 THROUGH DECEMBER 31, 2006                   |  | QuarterEnded8/31/06                           |       |      | QuarterEnded11/30/06 |       |      | MonthEnded12/31/06 |       |   | SevenMonthsTotal |       
|                                                          |  | (Amounts in thousands, except per share data) |      
|Operating revenues                                        |  | $                                             | 4,036 |      |                      | 4,646 |      |                    | 1,633 |   |                  | 10,315 |  
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Gross profit                                              |  |                                               | 418   |      |                      | 202   |      |                    | (18   | ) |                  | 602    |  
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|General and administrative expenses                       |  |                                               | 762   |      |                      | 727   |      |                    | 278   |   |                  | 1,767  |  
|(Recovery of) provision for doubtful accounts             |  |                                               | (138  | )(c) |                      | 3     |      |                    | (1    | ) |                  | (136   | )
|Depreciation and amortization                             |  |                                               | 23    |      |                      | 29    |      |                    | 10    |   |                  | 62     |  
|Other expense (income)                                    |  |                                               | 23    |      |                      | (246  | )(d) |                    | 5     |   |                  | (218   | )
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Loss from continuing operations before income taxes       |  |                                               | (252  | )    |                      | (311  | )    |                    | (310  | ) |                  | (873   | )
|Income tax expense                                        |  |                                               | 23    |      |                      | 15    |      |                    | 5     |   |                  | 43     |  
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Net loss from continuing operations                       |  |                                               | (275  | )    |                      | (326  | )    |                    | (315  | ) |                  | (916   | )
|Loss from discontinued operations                         |  |                                               |      |      |                      | 20    |      |                    |      |   |                  | 20     |  
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Net loss                                                  |  | $                                             | (275  | )    |                      | (346  | )    |                    | (315  | ) |                  | (936   | )
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Basic loss per common share for continuing operations     |  | $                                             | (0.05 | )    |                      | (0.05 | )    |                    | (0.04 | ) |                  | (0.14  | )
|Basic loss per common share for discontinued operations   |  |                                               |      |      |                      | (0.00 | )    |                    |      |   |                  | (0.01  | )
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Net loss                                                  |  | $                                             | (0.05 | )    |                      | (0.05 | )    |                    | (0.04 | ) |                  | (0.15  | )
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Diluted loss per common share for continuing operations   |  | $                                             | (0.05 | )    |                      | (0.05 | )    |                    | (0.04 | ) |                  | (0.14  | )
|Diluted loss per common share for discontinued operations |  |                                               |      |      |                      | (0.00 | )    |                    |      |   |                  | (0.01  | )
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Net loss                                                  |  | $                                             | (0.05 | )    |                      | (0.05 | )    |                    | (0.04 | ) |                  | (0.15  | )
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Weighted Average Common Shares Outstanding  basic        |  |                                               | 5,902 |      |                      | 6,582 |      |                    | 7,655 |   |                  | 6,445  |  
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  
|Weighted Average Common Shares Outstanding  diluted      |  |                                               | 5,902 |      |                      | 6,582 |      |                    | 7,655 |   |                  | 6,445  |  
|                                                          |  |                                               |       |      |                      |       |      |                    |       |   |                  |        |  



|(c) | Includes a $150,000 recovery of an account written off in 1999.
|--- | ---------------------------------------------------------------

|(d) | Includes recognition of $250,000 of insurance policy proceeds due the Company.
|--- | ------------------------------------------------------------------------------



48



---

##### Table of Contents

|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|------------------------------------------------------------ |  | --------------------------------------------- | ----- | --- | ----------- | ------ | - | ------- | ------ | --- | ------- | ----- | --- | ----- | ------ | -
|                                                             |  | Quarter Ended                                 |       |     | Fiscal Year |       
|FISCAL 2006                                                  |  | 8/31/05                                       |       |     | 11/30/05    |        |   | 2/28/06 |        |     | 5/31/06 |       |     | Total |       
|                                                             |  | (Amounts in thousands, except per share data) |      
|Operating revenues                                           |  | $                                             | 6,301 |     |             | 6,756  |   |         | 5,585  |     |         | 5,314 |     |       | 23,956 |  
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|Gross profit                                                 |  |                                               | 583   |     |             | 979    |   |         | 1,006  |     |         | 826   | (g) |       | 3,394  |  
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|General and administrative expenses                          |  |                                               | 876   | (e) |             | 829    |   |         | 768    |     |         | 843   |     |       | 3,316  |  
|(Recovery of) provision for doubtful accounts                |  |                                               | (34   | )   |             | (2     | ) |         | (55    | )   |         | 3     |     |       | (88    | )
|Depreciation and amortization                                |  |                                               | 22    |     |             | 22     |   |         | 21     |     |         | 22    |     |       | 87     |  
|Other expense                                                |  |                                               | 5     |     |             | 5      |   |         | 127    | (f) |         | 45    |     |       | 182    |  
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|(Loss) income from continuing operations before income taxes |  |                                               | (286  | )   |             | 125    |   |         | 145    |     |         | (87   | )   |       | (103   | )
|Income tax expense                                           |  |                                               | 11    |     |             | 17     |   |         | 16     |     |         | 34    |     |       | 78     |  
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|Net (loss) income from continuing operations                 |  | $                                             | (297  | )   |             | 108    |   |         | 129    |     |         | (121  | )   |       | (181   | )
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|Basic (loss) income per common share                         |  | $                                             | (0.05 | )   |             | 0.02   |   |         | 0.02   |     |         | (0.02 | )   |       | (0.03  | )
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|Diluted (loss) income per common share                       |  | $                                             | (0.05 | )   |             | 0.01   |   |         | 0.01   |     |         | (0.02 | )   |       | (0.03  | )
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|Weighted Average Common Shares Outstanding  basic           |  |                                               | 5,682 |     |             | 5,815  |   |         | 5,851  |     |         | 5,883 |     |       | 5,808  |  
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  
|Weighted Average Common Shares Outstanding  diluted         |  |                                               | 5,682 |     |             | 10,591 |   |         | 10,443 |     |         | 5,883 |     |       | 5,808  |  
|                                                             |  |                                               |       |     |             |        |   |         |        |     |         |       |     |       |        |  



|(e) | Includes $69,000 of expenses attributable to the sale of the Series A Preferred Stock.
|--- | --------------------------------------------------------------------------------------

|(f) | Includes a $102,000 loss from software development.
|--- | ---------------------------------------------------

|(g) | Includes a $62,500 asset write down of eye care memberships.
|--- | ------------------------------------------------------------



|ITEM9A. | CONTROLS AND PROCEDURES
|------- | -----------------------

Our management is
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) and for assessing the effectiveness of our internal control over financial reporting. Our
internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United States generally accepted
accounting principles (GAAP).

There were no changes in our internal controls over financial reporting during the year ended
December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our
internal control over financial reporting is supported by written policies and procedures that:



| |  |  | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts
and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Managements assessment included an evaluation of the
design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this assessment, our management concluded that, as of December 31, 2007, our
internal control over financial reporting was effective.

Because of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of
changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.



49



---

##### Table of Contents

PART III



|ITEM10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|------- | ------------------------------------------------------

The following table lists our current executive officers and directors as well as the executive officers and directors serving at December 31, 2007. Each current director is serving a term that will expire at the Companys next
annual meeting. There are no family relationships among any of our directors or executive officers. John M. Hill began serving as our President and Chief Executive Officer on January 14, 2008, and was appointed as a director by our Board of
Directors on February 2, 2008. Mary Jane Johnson resigned from her position as President and Chief Executive Officer effective December 14, 2007 and from our Board of Directors on February 2, 2008.



|                        |  |     |  |                                                                                           
|----------------------- |  | --- |  | ------------------------------------------------------------------------------------------
|NAME                    |  | AGE |  | POSITION                                                                                  
|John M. Hill            |  | 57  |  | President,(1)(2)Chief Executive Officer,(1)(2)and Director(1)(2)                          
|Robert J. Landis        |  | 48  |  | Chairman of the Board of Directors,(1)(2)Chief Financial Officer,(1)(2)and Treasurer(1)(2)
|Paul Patti, Ph.D.       |  | 52  |  | Vice President of Clinical Operations(2)                                                  
|Steven Ramsland, Ed.D.  |  | 53  |  | Chief Development Officer(2)                                                              
|Mary Jane Johnson       |  | 57  |  | Director(1)(2)                                                                            
|Steven R. Peskin, M.D.  |  | 51  |  | Director(3)                                                                               
|Michel A. Sucher, M.D.  |  | 60  |  | Director(3)                                                                               
|Michael Yuhas           |  | 56  |  | Director(3)                                                                               
|Vijay Chevli            |  | 37  |  | Director(4)(5)                                                                            
|Michael D. Bakst, Ph.D. |  | 62  |  | Director(6)                                                                               



|(1) | Comprehensive Care Corporation.
|--- | -------------------------------

|(2) | Comprehensive Behavioral Care, Inc. (principal operating
subsidiary of the Company).
|--- | ------------------------------------------------------------------------------------

|(3) | Appointed January 12, 2007 by the holder of our Series A
Preferred Stock.
|--- | -------------------------------------------------------------------------

|(4) | Appointed June 29, 2007 by our Board of Directors.
|--- | --------------------------------------------------

|(5) | Mr. Chevli serves as our Audit Committee Financial
Expert as that term is defined in the rules of the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Appointed October 5, 2007 by our Board of Directors.
|--- | ----------------------------------------------------

JOHN M. HILL

John
M. Hill began service as our President and Chief Executive Officer in January 2008, and was appointed as a director in February 2008. From 2005 until joining CompCare, Mr. Hill served as Director of Channel Sales for Healthmedia, Inc., an
internet-based provider of behavior change services designed to increase compliance, reduce medical utilization and enhance productivity for health plans, employees, pharmaceutical companies and behavioral health organizations. From 2002 to 2005,
Mr. Hill was Vice President of Ultrasis Group Plc., a London-based provider of web-based and computer-delivered interactive behavioral healthcare products and associated services. From 1998 to 2001, Mr. Hill had been with ValueOptions, a
national managed behavioral healthcare company, where he served in a number of executive roles, including President. Mr. Hill earned a Bachelor of Science degree in Psychology from Towson State University in Towson, Maryland, and attended the
University of Maryland and Johns Hopkins University for graduate level education in Social Work and Health Administration.

ROBERT J. LANDIS, CPA, MBA

Mr. Landis has served as a director of the Company since April 1999, as Chairman of our Board of Directors since January 2000 and
as our Chief Financial Officer and Treasurer since July 1998. Mr. Landis served as Treasurer of Maxicare Health Plans, Inc., a health maintenance organization, from November 1988 to July 1998. Mr. Landis also serves on the Board of
Directors and on the audit committee of Global Axcess Corporation, a company that owns and operates automatic teller machines, whose common stock is publicly traded on the Over-The-Counter Bulletin Board. Further, Mr. Landis serves on the Board
of Directors and on the audit committee of Nyer Medical Group, Inc., a publicly-traded company engaged in the ownership and operation of pharmacies. Mr. Landis, a Certified Public Accountant, received a Bachelors Degree in Business
Administration from the University of Southern California and a Masters Degree in Business Administration from California State University at Northridge.



50



---

##### Table of Contents

PAUL PATTI, Ph.D.

Dr. Patti has been employed by the Company since July 2003. He was promoted to Vice President of Clinical Operations in January of 2004. In this role, Dr. Patti manages all aspects of clinical protocol
development and delivery of behavioral health services. Dr. Patti is a licensed psychologist with over 20 years of managed care and clinical experience. Prior to joining the Company, Dr. Patti was Vice President of Operations for Horizon
Behavioral Health from 2001 to 2003, Director of Outpatient Services for University Behavioral HealthCare from 2000 to 2001, and Vice President of Clinical Services for Integra from 1997 to 1999. Dr. Patti received a Bachelor of Arts Degree
from Cornell University in 1977 and a Doctorate Degree in Clinical Psychology from Long Island University in 1986.

STEVEN RAMSLAND, Ed.D.

Dr. Ramsland has served as our Chief Development Officer since April 2007. In this role, Dr. Ramsland directs all aspects of
our strategic marketing and sales efforts. From 2004 to 2007, he held the position of Vice President, Sales, Marketing, and Development with United Behavioral Health, a subsidiary of UnitedHealth Group. In this position Dr. Ramsland specialized
in marketing behavioral health and disease management services to prospective public sector clients. Prior to United Behavioral Health, Dr. Ramsland was the Vice President, Government Programs for FHC Health Systems/Value Options, where he was
a senior business development manager focusing on the marketing of managed behavioral healthcare services to health plan and governmental payers from 1997 to 2004. Dr. Ramsland has a Bachelor of Arts degree in Psychology and English from
Trinity College, a Master of Arts degree in Clinical Psychology from Duquesne University, and a Doctor of Education degree in Counseling Psychology from Rutgers University.

MICHAEL D. BAKST, Ph.D.

Dr. Bakst was appointed to our Board of Directors on October 5,
2007. Dr. Bakst is currently a professor and instructor in the Department of Human Behavior and Department of Business at the College of Southern Nevada in Las Vegas, Nevada where he teaches undergraduate courses in psychology and business.
Dr. Bakst is also a consultant focusing on business performance, patient care, clinical services, and profitability. Dr. Baksts work experience additionally includes over 30 years of service in hospital senior management
positions, including 25 years as Chief Executive Officer of an acute care hospital in Ventura, California. Dr. Bakst earned a Bachelor of Arts degree in Business from Hofstra University in Hempstead, New York, an MBA from The George
Washington University in Washington, D.C., and a Doctorate in Counseling Psychology from Heed University in Hollywood, Florida.

VIJAY A. CHEVLI

Mr. Chevli was appointed as a director of the Company on June 29, 2007. Mr. Chevli is currently Head of Investment Banking
and Managing Director at The Mentor Group, a full service, national investment banking, valuation and appraisal firm. Mr. Chevli is also on the Board of Directors of the Southern California Chapter of an entrepreneurship mentoring organization,
TiE (Talent. Ideas. Entrepreneurship.), for which he also serves as an Executive Committee member. Prior to joining The Mentor Group, Mr. Chevli worked in the Mergers and Acquisitions and Private Equity Group at Houlihan Lokey Howard &
Zukin Capital. Mr. Chevli also worked at Wasserstein Perella & Co., where he focused on mergers and acquisitions, leveraged buyouts and recapitalizations, takeover defense advisory, solicitations, and strategic advisory services for
clients in various industry segments. Mr. Chevli earned a Bachelor of Arts degree in Economics/Business with a Computing Specialization from the University of California, Los Angeles, and his Masters in Business Administration degree from The
Anderson School at the University of California, Los Angeles.

STEVEN R. PESKIN, M.D.

Dr. Peskin has served as a director of the Company since January 2007. He is currently the
Chief Medical Officer of MediMedia USA. In addition, Dr. Peskin serves as an Assistant Clinical Professor of Medicine at the University of Medicine and Dentistry of New Jersey. Prior to joining MediMedia, and from September 2003 to June 2005,
Dr. Peskin was Chief Executive Officer of Pharmaceutical Research Plus, a firm specializing in patient recruitment and retention for clinical trials. He was previously Founder, President, and Chief Operating Officer of Nelson Managed Solutions,
a managed care consulting and marketing services agency from July 1995 through August 2003. Dr. Peskins professional experience also includes the positions of National Medical Director for Managed Care at John Hancock and Vice President
and Senior Medical Director for CIGNA® in Texas and PacifiCare® in Oklahoma. He earned his MD at Emory University School of
Medicine and his Masters Degree in Business Administration at Massachusetts Institute of Technology-Sloan School of Management, with a concentration in health care management.



51



---

##### Table of Contents

MICHEL SUCHER, M.D.

Dr. Sucher has been a member of our Board of Directors since January 2007. He is currently President of Greenberg & Sucher, PC, a consulting company in the field of mental health and substance abuse.
Since 2006 Dr. Sucher has also held the position of Director of Corporate Compliance for Rural/Metro Corporation, an ambulance and fire protection service company based in Scottsdale, Arizona. In addition, Dr. Sucher is the Acting Chief
Medical Officer of Cenpatico Behavioral Health of Arizona, a position he assumed in early 2007. From 2004 to 2005, he was employed by the State of Arizona as Acting Medical Director of the Division of Behavioral Health Services, and from 2004 to
2005, Acting Medical Director of the Bureau of Emergency Services. From February 2004 to October 2004 he served as Vice President of Clinical Affairs for Hythiam. Dr. Sucher is a nationally known speaker on addiction and emergency medicine and
holds various teaching positions throughout the greater Phoenix metropolitan area. He earned a Bachelor of Science degree and a Medical Degree from Wayne State University.

MICHAEL YUHAS

Mr. Yuhas joined our Board of Directors in January 2007. He is currently the
Chief Executive Officer and founder of Integra Health Management, a Maryland company that provides behavioral and medical health management consultative services to healthcare payers. Prior to founding Integra, Mr. Yuhas was an independent
consultant providing consulting services to various healthcare entities. From January 2003 to September 2005, Mr. Yuhas served as Chief Executive Officer for Health Integrated, Inc., a Florida health management company that delivers behavioral
health and medical case management services. Before Health Integrated, Mr. Yuhas served as Executive Vice President for Strategic Development at Magellan Health Services. Mr. Yuhas holds a Masters degree in psychology from Temple
University and completed doctoral-level training in epidemiology and public health at The Johns Hopkins University Bloomberg School of Public Health.

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Securities Exchange Act of
1934, as amended, an officer, director or greater than 10% stockholder of our outstanding common stock must file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities. Such persons are required by SEC
regulations to furnish us with copies of all such reports they file. Based solely upon a review of Section 16(a) reports furnished to us, we believe all such entities or persons subject to the Section 16(a) reporting requirements have
complied with applicable filing requirements during 2007, with the exception of the following:



|                       |  |                |  |           |  |                       |  |                                          
|---------------------- |  | -------------- |  | --------- |  | --------------------- |  | -----------------------------------------
|Name                   |  | Filingcapacity |  | Form type |  | Number oflate reports |  | Number of transactions notreported timely
|Steven Ramsland        |  | Officer        |  | 3         |  | 1                     |  | 0                                        
|Steven R. Peskin, M.D. |  | Director       |  | 3         |  | 1                     |  | 0                                        
|Michel A. Sucher, M.D. |  | Director       |  | 3         |  | 1                     |  | 0                                        
|Michael Yuhas          |  | Director       |  | 3         |  | 1                     |  | 0                                        
|Harry Ross             |  | 10% owner      |  | 4         |  | 1                     |  | 1                                        

Form 3 reports for Messrs. Ramsland, Peskin, Sucher, and Yuhas were filed late due to administrative oversight.

Code of Ethics

We have adopted a code
of ethics applicable to all of our employees, including our principal executive officer, principal financial officer, and persons performing similar functions. The text of this code of ethics can be found on our website at
www.compcare-shareholders.com. We intend to post notice of any waiver from, or amendment to, any provision of our code of ethics on our website.

Audit
Committee

At December 31, 2007, our Audit Committee consists of Vijay Chevli (chairman), Steven R. Peskin, M.D., and Michael D,
Bakst. The Board of Directors has determined that all members of the Committee were independent as defined



52



---

##### Table of Contents

in Section 121(A) of the American Stock Exchanges listing standards and that Mr. Chevli qualifies as an audit committee financial
expert, as defined by Item 401(h)(2) of Regulation S-K. The Audit Committee held four meetings during the year ended December 31, 2007.



|ITEM11. | EXECUTIVE COMPENSATION
|------- | ----------------------

COMPENSATION DISCUSSION
AND ANALYSIS

We believe our long-term success is dependent on a leadership team with the integrity, skills, and dedication necessary
to oversee a growing organization on a day-to-day basis. In addition, the leadership team must have the vision to anticipate and respond to future market and regulatory developments. Our executive compensation program is designed to enable us to
attract, motivate and retain a senior management team with the collective and individual abilities to meet these challenges. The programs primary objective is to align executives efforts with the long-term interests of stockholders by
enhancing our reputation, financial success and capabilities.

The primary components of executive compensation for each of our four named
executive officers includes a base salary, provision for an annual incentive bonus, and provisions for the award of stock options. These components are designed, in the aggregate, to be competitive with comparable organizations and to align the
financial incentives for the executives with the short and long term interests of stockholders.

The Compensation and Stock Option
Committee (Compensation Committee) establishes the compensation packages of the executive officers. The members of the Compensation Committee are independent as defined by the American Stock Exchange listing standards.

Overview and Philosophy

The
Compensation Committees policies are designed to enable the Company to attract and retain outstanding executives in the healthcare industry to assist the Company in meeting its long-range objectives, thereby serving the interests of the
Companys stockholders. The Compensation Committees compensation philosophy is to provide rewards that (1) are linked to both Company performance and individual performance, (2) align employee interests with stockholder
interests, (3) are sufficient to attract and retain high-quality employees, and (4) provide a mix of cash and potential stock ownership tied to long-term as well as immediate business strategies.

The following key principles guide the Compensation Committee in structuring compensation targets and packages of executive officers and key management:



| |  |  | Total annual compensation will include salary as the core compensation plus options to purchase shares of the Companys common stock, the value of which
is a function of the market price, which is an extension of stockholder interests.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Management development includes support of compensation opportunity structures to attract and retain individuals who can maximize the creation of stockholder
value, and motivate employees to attain Company and individual objectives.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recognition of individual contributions as well as overall Company results toward identified business results.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Competitive position of both base salary and total compensation within the healthcare industry.
| | - |  | -----------------------------------------------------------------------------------------------

Determination of Compensation

The
Compensation Committee determines the total compensation levels for our executive officers by considering several factors, including each executive officers role and responsibilities, how the executive officer is performing against those
responsibilities, our performance, and the competitive market data applicable to each executive officers position.

In arriving at
specific levels of compensation for executive officers, the Compensation Committee has relied on:



| |  |  | the recommendations of management,
| | - |  | ----------------------------------



| |  |  | benchmarks provided by generally available compensation surveys, and
| | - |  | --------------------------------------------------------------------



| |  |  | the experience of Compensation Committee members and their knowledge of compensation paid by comparable companies or companies of similar size or generally engaged
in the healthcare services business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53



---

##### Table of Contents

We seek an appropriate relationship between executive pay and corporate performance. Executive officers
are entitled to customary benefits generally available to all Company employees, including group medical, dental and life insurance, and a 401(k) plan. We have employment agreements and severance arrangements with our key executive officers to
provide them with the employment security and severance deemed necessary to retain them.

Components of Executive Compensation

Base Salary. Base salaries provide our executive officers with a degree of financial certainty and stability, and are intended to be maintained at slightly above
the median range of salary for similar positions at public companies that are in the same line of business as the Company and which are of similar size. We seek to provide base salaries sufficient to attract and retain highly qualified executives.
The Compensation Committee establishes the base salaries of our executive officers, and salaries are reviewed in the case of executive promotions or other significant changes in responsibilities. In each case, the Compensation Committee takes into
account competitive salary practices, scope of responsibilities, the results previously achieved by the executive and his or her development potential.

The Compensation Committee has the responsibility to determine increases or decreases in base salaries on an individual basis. Our objective is to reward performance consistent with our overall financial performance
in the context of competitive practice, including changes to an executive officers scope of responsibilities, in combination with general market trends. No formulaic base salary increases are provided to the named executive officers.

In addition to complying with the executive compensation policy and the requirements of applicable employment agreements, compensation for
each of the executive officers during the year ended December 31, 2007 was based on the executives performance of his or her duties and responsibilities, the performance of the Company, both financial and otherwise, and the success of the
executive in managing, developing and executing our business development, sales and marketing, financing and strategic plans, as appropriate.

Annual
Incentive Bonus. Executive officers are eligible to receive cash bonuses based on the degree of the Companys achievement of financial and other objectives. The primary purpose of our annual performance incentive awards is to motivate our
executives to meet or exceed our short-term and long-term performance objectives. Our annual cash bonuses are designed to reward our executive officers for their contributions toward corporate objectives.

During 2007, our Chief Executive Officer was eligible to receive an annual performance bonus
calculated as the greater of $25,000 or 21/2% of the Companys earnings before interest, taxes, depreciation and
amortization (EBITDA), except that no bonus would have been paid in the event that EBITDA was calculated to be a loss. The calculation of EBITDA includes any expense from the performance bonus.

During 2008, our new Chief Executive Officer will be eligible to earn an annual performance based bonus of up to 150% of base salary for the achievement
of Company financial objectives and individual non-financial objectives as defined by our Board of Directors.

Our Chief Financial Officer is eligible to receive an annual performance bonus calculated as the greater of $20,000 or 21/2% of the Companys EBITDA. The calculation of EBITDA will include any expense from the performance bonus, and no bonus will be paid in the event that EBITDA is calculated to be a loss. The Compensation Committee
reserves the right to increase the performance bonus in the case of exceptional performance.

The Chief Development Officer is
eligible to earn sales commissions for achievement of annually established targets for obtaining new business. The Vice President of Clinical Operations may receive an annual cash bonus as determined by the Compensation Committee in its sole
discretion. Criteria for earning such a bonus are yet to be established.

Stock, stock options, and similar equity instruments. Equity participation
is a key component of our executive compensation program. Under our 2002 Incentive Compensation Plan (the Plan), as amended, we are permitted to award our common stock, stock options, stock appreciation rights, restricted stock, and
restricted stock units to officers, employees, and consultants. To date, stock options have been the sole means of providing equity participation. Options are designed to retain executive officers and motivate them to enhance stockholder value by
aligning their financial interests with those of our stockholders. Stock options are intended to enable us to attract and retain key personnel and provide an effective incentive for management to create stockholder value over the long term since the
option value depends on appreciation in the price of our common stock.

The employment contract of our former Chief Executive Officer
specified that she receive an annual grant of 25,000 stock options. Our Chief Financial Officers employment agreement requires the same annual stock option award. Such options are awarded without regard to company or individual performance and
are typically granted on the date of the



54



---

##### Table of Contents

Companys Annual Meeting. Our new Chief Executive Officer was granted 100,000 options on his start date and will receive an additional 50,000 options on
the first and second anniversaries of his employment date. The Chief Development Officer and Vice President of Clinical Operations are eligible to receive stock options at the time options are granted to employees, which customarily occurs on the
date of our Annual Meeting. In certain instances, stock options may be granted to executive officers upon hiring as part of an employment package intended to attract top candidates. In the past we have not timed stock option grants in coordination
with the release of material nonpublic information, nor do we plan to do so in the future. Stock option grants to employees are at the discretion of the Compensation Committee, which utilizes recommendations from management in determining awards.
Stock option exercise prices are determined in accordance with the Plan, which specifies that the exercise price will be equal to fair market value of a share of our common stock on the date of grant. Such grants provide an incentive for our
executives and other employees to increase our market value, as represented by our market price, as well as serving as a method for motivating and retaining our executives.

We have adopted SFAS 123R Share-Based Payment, which requires that we show expense in our financial statements equivalent to the fair value
of stock options granted. The expense is a negative consequence that has resulted in a reduction in recent option grants, for those grants at the discretion of the Compensation Committee, which includes grants to the Chief Development Officer and
Vice President of Clinical Operations. We expect that future grants of discretionary stock options will be limited due the effects of SFAS 123R.

In determining to provide long-term incentive awards in the form of stock options, the Compensation Committee considered cost and dilution impact, market trends relating to long-term incentive compensation and other relevant factors. The
Compensation Committee determined that an award of stock options more closely aligns the interests of the recipient with those of our stockholders because the recipient will only realize a return on the option if our stock price increases over the
term of the option.

Perquisites and Other Benefits. Other than an auto allowance paid biweekly to certain executive officers, we do not provide our
executive officers with perquisites. Executives participate in our various health plans and our 401(k) retirement plan on a non-preferential basis, and are charged the same rates as all other employees. We do not provide deferred compensation.

We may offer relocation assistance to attract and facilitate the addition of an executive officer to our management team. Such assistance
will typically comprise reimbursements for travel, temporary housing costs and general moving costs. These reimbursements may or may not be included in the compensation of the executive officer, depending on compliance with certain rules of the IRS.



55



---

##### Table of Contents

Summary Compensation Table

The following table sets forth the cash and non-cash compensation for our named executive officers during the 2007 calendar year.



|                                                |  |         |  |           |  |          |     |  |                     |  |                                         |     |  |          |     |  |         
|----------------------------------------------- |  | ------- |  | --------- |  | -------- | --- |  | ------------------- |  | --------------------------------------- | --- |  | -------- | --- |  | --------
|Name and Principal Position                     |  | Year(1) |  | Salary($) |  | Bonus($) |     |  | OptionAwards($) (2) |  | Non-EquityIncentive PlanCompensation($) |     |  | Other($) |     |  | Total($)
|Mary Jane Johnson                               |  | 2007    |  | 220,001   |  | 25,000   | (3) |  | 29,053              |  |                                        |     |  | 424,183  | (5) |  | 698,237 
|President and Chief Executive Officer           |  |         |  |           |  |          |     |  |                     |  |                                         |     |  |          |     |  |         
|                                                |  |         |  |           |  |          |    
|Robert J. Landis                                |  | 2007    |  | 190,000   |  | 20,000   | (3) |  | 29,053              |  |                                        |     |  | 7,892    | (6) |  | 246,945 
|Chairman, Treasurer and Chief Financial Officer |  |         |  |           |  |          |     |  |                     |  |                                         |     |  |          |     |  |         
|                                                |  |         |  |           |  |          |    
|Paul Patti, Ph.D.                               |  | 2007    |  | 119,192   |  |         |     |  |                    |  |                                        |     |  | 3,158    | (7) |  | 122,350 
|Vice President of Clinical Operations           |  |         |  |           |  |          |     |  |                     |  |                                         |     |  |          |     |  |         
|                                                |  |         |  |           |  |          |    
|Steven Ramsland, Ed.D. (8)                      |  | 2007    |  | 86,154    |  |         |     |  | 8,983               |  | 10,500                                  | (4) |  |         |     |  | 105,637 
|Chief Development Officer                       |  |         |  |           |  |          |     |  |                     |  |                                         |     |  |          |     |  |         



|(1) | Amounts shown are for the 2007 calendar year.
|--- | ---------------------------------------------

|(2) | Amounts reflect compensation expense recognized in our financial statements during calendar 2007 for stock option awards in calendar 2007 and in previous years calculated in
accordance with SFAS 123R Share-Based Payment. As such, these amounts do not correspond to the compensation actually realized by each officer. Amounts have not been reduced by estimates of forfeitures related to service based vesting
conditions, and are computed using the Black-Sholes option pricing model, which incorporates various assumptions about volatility, expected dividend yield, expected life, and applicable interest rates. See Critical Accounting Estimates 
Stock Compensation Expense in Managements Discussion and Analysis and Note 15 Preferred Stock, Common Stock, and Stock Option Plans to our consolidated, audited financial statements for further information regarding the
assumptions used to value stock options. There were no forfeitures during calendar 2007 by executive officers.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Amount represents an annual performance cash bonus paid in accordance with the executive officers employment agreement relating to the fiscal year ended May 31, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Amount is an advance of future sales commissions to be earned.
|--- | --------------------------------------------------------------

|(5) | Amount is comprised of $666 of Company matching contributions to the executive officers defined contribution plan, $6,500 in auto allowances, $7,017 of unused vacation paid
out at termination, and $410,000 of severance benefits accrued in 2007 and paid in 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Represents an auto allowance of $6,500 and $1,392 in Company matching contributions to the executive officers defined contribution plan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(7) | Amount represents an auto allowance of $2,600 and Company matching contributions to the executive officers defined contribution plan of $558.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Mr. Ramslands employment with us commenced on April 16, 2007.
|--- | --------------------------------------------------------------

Executive Employment Agreements

Chief Executive Officer

Our former CEOs employment agreement provided for a salary of $205,000 per annum and included provisions for an annual performance bonus based on
our EBITDA. Ms. Johnson received a base salary of $205,001 in 2007 plus a $15,000 payment compensating her for salary foregone in prior years resulting from cost cutting initiatives. Ms. Johnson was provided an auto allowance of $250
biweekly as well as a policy of life insurance. In addition, we paid for a portion of Ms. Johnsons health insurance and other group insurance premiums in accordance with our general benefit guidelines covering all full-time employees.
Ms. Johnson did not receive a grant of stock options during 2007.



56



---

##### Table of Contents

We have executed an offer letter with our new CEO, Mr. John M. Hill, that was effective with
his starting date of January 14, 2008 and is for a term of three years. Mr. Hill will receive a base salary of $205,000 per annum and is eligible to earn an annual performance based incentive bonus of up to 150% of base salary for the
achievement of our financial objectives and individual non-financial objectives as defined by our Board of Directors. In addition, we will pay for a portion of Mr. Hills health insurance and other group insurance premiums in accordance
with the Companys general benefit guidelines covering all full-time employees. A biweekly auto allowance of $250 will also be provided. Mr. Hills offer letter further states that he will be granted 100,000 stock options upon his
start date. Onehalf of such options will vest one year from his start date and the remainder will vest two years after his start date. Provisions for the granting of 50,000 additional options on the first and second anniversaries of
Mr. Hills start date are also included in the offer letter. In order to facilitate Mr. Hills relocation to the vicinity of our corporate headquarters, we will provide Mr. Hill with relocation assistance to cover travel,
temporary housing, and general moving costs to a maximum of $50,000.

Chief Financial Officer

We entered into an employment agreement with Robert J. Landis effective February 1, 2003, which was amended on June 14, 2005. The agreement was
originally effective through May 31, 2006, but has been automatically renewed and extended until May 31, 2009 in accordance with two available 18 month extensions under the contract. Mr. Landis employment agreement provides for
a salary of $185,000 per annum and includes an annual performance bonus based on the Companys EBITDA. Mr. Landis received a base salary of $185,000 in 2007 plus a $5,000 payment compensating him for salary foregone in prior years under
cost cutting initiatives. In addition, we pay for a portion of Mr. Landis health insurance and other group insurance premiums in accordance with our general benefit guidelines covering all full-time employees. Mr. Landis is also
provided with a policy of life insurance and a $250 biweekly auto allowance. Mr. Landis is additionally eligible to receive a special transaction bonus should the company merge with or into another entity in which the Company is not the
surviving entity, or if we sell all or substantially all of our assets and the special transaction is $5.0 million or greater. The special transaction bonus shall be an amount equal to 1% of the special transaction value in excess of $5.0 million.
Coincident with our annual meetings of stockholders, Mr. Landis is granted options to purchase 25,000 shares of our common stock. The options will bear an exercise price of the fair market value of our stock on the date of grant and will vest
in accordance with terms determined by the Compensation Committee. No such stock options were granted to Mr. Landis in 2007.

Other Executive
Officers

The annual base salary for Dr. Patti is currently set at $120,000. Dr. Patti is eligible to receive a cash bonus and
other additional compensation, the amount and timing of which is at the discretion of the Compensation Committee. During calendar 2007, Dr. Patti did not receive a grant of stock options.

Dr. Ramsland is compensated at the rate of $140,000 per annum, and is eligible to receive commissions on sales of our behavioral healthcare
services. In July 2007, Dr. Ramsland was granted stock options to purchase 20,000 shares of our stock pursuant to a provision in his pre-hiring offer letter. The options have an exercise price equal to the fair market value of the stock on the
date of grant and will vest in 50% increments beginning six months after the grant date.

Confidentiality agreements

We require that each employee, including all officers, sign a confidentiality agreement stating that as long as the employee works for us, and after the
employees termination for any reason, the employee may not disclose in any manner our proprietary confidential information.

Indemnification
matters

In connection with our indemnification program for executive officers and directors, Mr. Hill, Ms. Johnson,
Mr. Landis, Dr. Patti, and Dr. Ramsland, as well as ten current, key management employees, directors, or subsidiary directors, eighteen former directors, and fourteen former executive officers, are entitled to indemnification. We
consider it desirable to provide each indemnitee with specified assurances that we can and will honor our obligations under the Indemnification Agreements, including a policy of insurance to provide for directors and officers liability coverage.



57



---

##### Table of Contents

Grants of Plan Based Awards

The table below sets forth information with respect to options granted to our named executive officers during calendar 2007.



|                            |  |           |  |                                                                 |  |                           |  |                                           
|--------------------------- |  | --------- |  | --------------------------------------------------------------- |  | ------------------------- |  | ------------------------------------------
|Name and Principal Position |  | GrantDate |  | All Other Option Awards:Number of Securities Underlying Options |  | ExercisePrice($/share)(1) |  | Grant DateFair Value
ofOption Awards($)(2)
|Steven Ramsland             |  | 07/02/07  |  | 20,000                                                          |  | 1.12                      |  | 18,064                                    
|Chief Development Officer   |  |           |  |                                                                 |  |                           |  |                                           



|(1) | The options to purchase our common stock are exercisable at a price equal to the closing price of the stock on the date of grant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | The grant date fair value of stock options is calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected volatility, expected
life of the options and applicable interest rates. See Critical Accounting Estimates  Stock Compensation Expense in Managements Discussion and Analysis and Note 15 Preferred Stock, Common Stock, and Stock Option
Plans to our consolidated, audited financial statements for further information regarding the assumptions used to value stock options.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



58



---

##### Table of Contents

Outstanding Equity Awards at Year-end

The following table sets forth all outstanding equity awards held by our named executive officers as of December 31, 2007.



|                  |                |                                                |                  |        |                   |        |                |         
|----------------- | -------------- | ---------------------------------------------- | ---------------- | ------ | ----------------- | ------ | -------------- | --------
|Name              |                | Number of shares underlyingunexercised options |                  | Option |                   | Option
|                  | Exercisable(#) |                                                | Unexercisable(#) |        | Exercise Price($) |        | ExpirationDate
|Mary Jane Johnson |                | 20,000                                         |                  |       |                   | 4.0000 |                | 12/14/08
|                  |                | 75,000                                         |                  |       |                   | 0.5625 |                | 07/06/09
|                  |                | 75,000                                         |                  |       |                   | 0.2656 |                | 01/14/10
|                  |                | 50,000                                         |                  |       |                   | 0.2500 |                | 01/02/11
|                  |                | 25,000                                         |                  |       |                   | 0.5100 |                | 11/07/12
|                  |                | 25,000                                         |                  |       |                   | 1.4000 |                | 02/07/13
|                  |                | 25,000                                         |                  |       |                   | 1.7000 |                | 01/23/14
|                  |                | 25,000                                         |                  |       |                   | 1.4500 |                | 03/11/15
|                  |                | 25,000                                         |                  |       |                   | 1.7800 |                | 10/28/15
|                  |                | 25,000                                         |                  |       |                   | 1.8000 |                | 11/17/16
|                  |                |                                                |                  |        |                   |        |                |         
|Total             |                | 370,000                                        |                  |       |                   |        |                |         
|                  |                |                                                |                  |        |                   |        |                |         
|Robert J. Landis  |                | 65,625                                         |                  |       |                   | 4.0000 |                | 12/14/08
|                  |                | 75,000                                         |                  |       |                   | 0.5625 |                | 07/06/09
|                  |                | 50,000                                         |                  |       |                   | 0.2500 |                | 01/02/11
|                  |                | 25,000                                         |                  |       |                   | 0.5100 |                | 11/07/12
|                  |                | 25,000                                         |                  |       |                   | 1.4000 |                | 02/07/13
|                  |                | 25,000                                         |                  |       |                   | 1.7000 |                | 01/23/14
|                  |                | 25,000                                         |                  |       |                   | 1.4500 |                | 03/11/15
|                  |                | 25,000                                         |                  |       |                   | 1.7800 |                | 10/28/15
|                  |                | 25,000                                         |                  |       |                   | 1.8000 |                | 11/17/16
|                  |                |                                                |                  |        |                   |        |                |         
|Total             |                | 340,625                                        |                  |       |                   |        |                |         
|                  |                |                                                |                  |        |                   |        |                |         
|Paul Patti        |                | 10,000                                         |                  |       |                   | 2.1600 |                | 11/18/13
|                  |                | 7,500                                          |                  |       |                   | 1.1000 |                | 10/05/14
|                  |                | 5,000                                          |                  |       |                   | 1.7800 |                | 10/28/15
|                  |                |                                                |                  |        |                   |        |                |         
|Total             |                | 22,500                                         |                  |       |                   |        |                |         
|                  |                |                                                |                  |        |                   |        |                |         
|Steven Ramsland   |                |                                               |                  | 20,000 |                   | 1.1200 |                | 07/02/17
|                  |                |                                                |                  |        |                   |        |                |         
|Total             |                |                                               |                  | 20,000 |                   |        |                |         
|                  |                |                                                |                  |        |                   |        |                |         

Option Exercises and Stock Vested

There were no stock options exercised by any of our named executive officers during the year ended December 31, 2007. We have not issued restricted
stock, restricted stock units, or similar instruments.

Potential Payments upon Termination or Change in Control

Potential payments upon termination

The following summarizes the payments and benefits the named executive officers received, or would have been entitled to if their employment with us had terminated during 2007.

Our former CEO, Mary Jane Johnson, resigned effective December 14, 2007 for health reasons. Her resignation occurred within one year of the change
in control that occurred January 12, 2007, which according to her employment agreement, entitled her to a severance payment equal to twice her annual salary, or $410,000. We made such payment in January 2008. Other benefits, such as health
insurance and disability coverages, ceased at Ms. Johnsons termination date.



59



---

##### Table of Contents

If Mr. Landis employment is terminated for cause, his salary will paid through the date of
termination, with no further payments of any type due. Should we not renew his employment contract, he will be paid a severance payment equal to two years base salary, or $370,000. In addition, commencing upon the expiration of his employment
agreement, we will continue to provide him and his dependents with healthcare insurance coverage for 18 months, valued at approximately $15,000. If Mr. Landis becomes totally disabled such that he is unable to substantially perform his duties,
or if he is terminated without cause, he will receive an amount equal to the greater of the balance of his base salary for the remainder of his employment term or two years base salary. Should we materially curtail or diminish his duties and
responsibilities, and Mr. Landis provides the Company with 60 days notice that he elects to terminate his employment, he will receive the greater of two years base salary or the balance of his base salary for the remainder of his
employment term.

Should Dr. Pattis employment be terminated for cause, or if he becomes permanently disabled, his salary will
be paid through the date of termination, with no further payments of any type due. If Dr. Patti is terminated without cause, he will be entitled to receive one months base salary for each year of service with the Company, to a maximum of
three months.

If Dr. Ramslands employment is terminated for cause, or if he becomes permanently disabled, his salary will be
paid through the date of termination, with no further payments of any type due.

Potential payments upon change in control

In the event of a change in control, Mr. Landis, at his sole discretion, may elect to terminate his employment at any time within
one year. Upon his election to resign, he will receive a lump sum severance payment equal to two times his base salary, or $370,000. Dr. Patti will receive a payment equal to three months of his base salary, or $30,000, if he is terminated by
us without cause within three months of the date of a change in control. Unvested stock options for all employees, including named executives, would vest immediately upon a change in control.



60



---

##### Table of Contents

Director Compensation

The following table provides information regarding compensation paid to non-employee directors during the twelve-month period ended December 31,
2007.



|                          |  |                         |  |                    |  |                      |   |  |            
|------------------------- |  | ----------------------- |  | ------------------ |  | -------------------- | - |  | -----------
|Name                      |  | Fees PaidIn Cash($) (1) |  | Fees Earned($) (1) |  | Option Awards($) (2) |   |  | Total($)(8)
|Former directors:         |  |                         |  |                    |  |                      |   |  |            
|                          |  |                         |  |                   
|Eugene L. Froelich (3)    |  | 40,000                  |  | 36,667             |  | (4,645               | ) |  | 32,022     
|Robert Parker (4)         |  |                        |  | 36,667             |  | (6,798               | ) |  | 29,869     
|David P. Schuster (5)     |  |                        |  | 36,667             |  | 2,727                |   |  | 39,394     
|Barry A. Stein, Ph.D. (4) |  |                        |  | 36,667             |  | (6,470               | ) |  | 30,197     
|Peter Jesse Walcott (4)   |  |                        |  | 36,667             |  | (6,470               | ) |  | 30,197     



|                        |  |                     |  |                    |  |                      |  |            
|----------------------- |  | ------------------- |  | ------------------ |  | -------------------- |  | -----------
|Name                    |  | Fees PaidIn Cash($) |  | Fees Earned($) (6) |  | Option Awards($) (7) |  | Total($)(8)
|Current directors:      |  |                     |  |                    |  |                      |  |            
|                        |  |                     |  |                   
|Steven R. Peskin, M.D.  |  | 15,750              |  | 15,750             |  | 9,531                |  | 25,281     
|Michel Sucher, M.D.     |  | 14,500              |  | 14,500             |  | 9,531                |  | 24,031     
|Michael Yuhas           |  | 15,750              |  | 15,750             |  | 9,531                |  | 25,281     
|Vijay Chevli            |  | 11,250              |  | 13,125             |  | 9,531                |  | 22,656     
|Michael D. Bakst, Ph.D. |  | 3,125               |  | 3,125              |  | 3,104                |  | 6,229      



|(1) | In December 2006, the Board of Directors instituted a cash compensation plan for non-employee directors whereby each non-employee director would be paid $40,000 in advance for
services over the next 12 months, beginning with December 2006. The fees were earned monthly at the rate of $3,333 per month. Four of the five directors received payment of the annual retainer in December 2006, while Mr. Froelich received
payment in January 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts reflect compensation expense recognized in our financial statements during calendar 2007 resulting from grants of stock options to non-employee directors in 2007 and in
previous years. As such, these amounts do not represent compensation actually realized by each director during the year. The options were granted in accordance with our Non-employee Directors Stock Option Plan, as amended, which specifies that
the options would vest equally over five years and would have an exercise price calculated as the average of the bid and ask price of a share of the Companys stock on the day prior to the date of the grant date. The grant date fair value of
the stock options, which were granted in 2006, was $55,277 for each director. At December 31, 2007, no options were held by former directors. Bracketed amounts in this column result from reversal of amounts previously recognized as expense on
unvested options that were forfeited due to the resignation of the director. Fair value was calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected volatility, expected life of the options
and applicable interest rates. See Critical Accounting Estimates  Stock Compensation Expense in Managements Discussion and Analysis and Note 15 Preferred Stock, Common Stock, and Stock Option Plans to our
consolidated, audited financial statements for further information regarding the assumptions used to value stock options.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Resigned January 17, 2007.
|--- | --------------------------

|(4) | Resigned January 12, 2007 as the result of a change in control of the Company.
|--- | ------------------------------------------------------------------------------

|(5) | Resigned June 25, 2007.
|--- | -----------------------

|(6) | Amounts represent fees earned for service as a director on our Board of Directors and as a member of one or more Board committees. Fees are paid quarterly in advance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



61



---

##### Table of Contents

|(7) | Amounts reflect compensation expense recognized in our financial statements during calendar 2007 resulting from grants of stock options to non-employee directors in 2007. As such,
these amounts do not represent compensation actually realized by each director during the year. Fair value was calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected volatility, expected
life of the options and applicable interest rates. See Critical Accounting Estimates  Stock Compensation Expense in Managements Discussion and Analysis and Note 15 Preferred Stock, Common Stock, and Stock Option
Plans to our consolidated, audited financial statements for further information regarding the assumptions used to value stock options. Outstanding stock option awards, by non-employee director as of December 31, 2007, were as follows:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                        |  |                         |  |                                                             |       
|----------------------- |  | ----------------------- |  | ----------------------------------------------------------- | ------
|Name:                   |  | Options Outstanding (#) |  | Aggregate Grant DateFair Market Value ofOptions Outstanding
|Steven R. Peskin, M.D.  |  | 25,000                  |  | $                                                           | 19,167
|Michel Sucher, M.D.     |  | 25,000                  |  |                                                             | 19,167
|Michael Yuhas           |  | 25,000                  |  |                                                             | 19,167
|Vijay Chevli            |  | 25,000                  |  |                                                             | 19,167
|Michael D. Bakst, Ph.D. |  | 25,000                  |  |                                                             | 14,753



|(8) | The Total Column is the sum of the Fees Earned column and the Option Awards column, which is the total expense recognized in our financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

Members of the Board of Directors who are also officers or employees of the Company receive no compensation for serving as directors. Effective
June 29, 2007, non-employee directors are compensated with a $15,000 annual retainer and an annual award of 15,000 stock options. Additionally, non-employee directors serving as a chairman of a Board committee are further compensated as
follows:



|                                              |  |                 |      
|--------------------------------------------- |  | --------------- | -----
|Committee:                                    |  | Annual Retainer
|Audit Committee                               |  | $               | 7,500
|Compensation Committee                        |  |                 | 2,500
|Nominating and Corporate Governance Committee |  |                 | 2,500
|Special Committee (if convened)               |  |                 | 7,500

Limitations on the deductibility of compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended (the Tax Code), places a limit of $1.0 million on the amount of
compensation that we can deduct in any one year with respect to each of our five most highly paid executive officers. However, certain performance-based compensation as defined by Section 162(m) of the Tax Code is not subject to the deduction
limit. The Board of Directors believes that all anticipated compensation during the seven-month stub tax period ending December 31, 2007 will satisfy the requirements of Section 162(m) of the Tax Code and, as such, would be deductible for
federal income tax purposes. Further, our Compensation Committee believes that the deductibility of officer compensation in excess of the $1.0 million threshold is not likely to be an issue for us to address in the foreseeable future.

Compensation committee interlocks and insider participation

No member of the Compensation Committee was at any time during the past year an officer or employee of the Company, was formerly an officer of the Company or any of our subsidiaries, or had any employment relationship with us.

During 2007, none of our executive officers served as:



| |  |  | a member of the Compensation Committee (or other committee of the Board of Directors performing equivalent functions or, in the absence of any such committee, the
entire Board of Directors) of another entity, one of whose executive officers served on our Compensation Committee;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a director of another entity one of whose executive officers served on our compensation committee; or
| | - |  | -----------------------------------------------------------------------------------------------------



62



---

##### Table of Contents

| |  |  | a member of the compensation committee (or other committee of the Board of Directors performing equivalent functions or, in the absence of any such committee, the
entire Board of Directors) of another entity, one of whose executive officers served as a director of the Company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

COMPENSATION
COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth in this
annual report on Form 10-K with management and based on such discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis section be included herein.

Submitted by the Compensation Committee:



| |  |                         |  | 
| |  | ----------------------- |  | 
| |  | Michael Yuhas, Chairman |  | 
| |  | Michel Sucher, M.D.     |  | 
| |  | Vijay A. Chevli         |  | 

Dated: March 11, 2008



|ITEM12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|------- | ----------------------------------------------------------------------------------------------

Equity Compensation Plan Information

The following table summarizes share and exercise price information with
respect to the Companys equity compensation plans (including individual compensation arrangements) under which equity securities of Comprehensive Care Corporation are authorized for issuance as of December 31, 2007:



|                                                        |  |                                                                                             |  |                                                                             |      |                                                                                                                                            |          
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------
|Plan category                                           |  | (a)Number of securities tobe issued upon exerciseof
outstanding options,warrants and rights |  | (b)Weighted-averageexercise price ofoutstanding options,warrants and rights |      | (c)Number of securities remainingavailable for future
issuanceunder equity compensationplans (excluding securitiesreflected in column (a))
|Equity compensation plans approved by shareholders      |  | 1,070,375                                                                                   |  | $                                                                           | 1.27 |                                                                                                                                            | 1,276,668
|Equity compensation plans not approved by shareholders* |  | 406,000                                                                                     |  |                                                                             | 1.78 |                                                                                                                                            |         
|                                                        |  |                                                                                             |  |                                                                             |      |                                                                                                                                            |          
|Total                                                   |  | 1,476,375                                                                                   |  | $                                                                           | 1.41 |                                                                                                                                            | 1,276,668
|                                                        |  |                                                                                             |  |                                                                             |      |                                                                                                                                            |          



|* | Consists of 100,000 warrants to purchase common stock of the Company issued in prior fiscal years to three consultants for their services to the Company, which included public and
investor relations and web site development services. In addition, 306,000 warrants to purchase common stock of the Company were issued in a prior fiscal year to two consultants and two employees as compensation for introducing strategic business
partners to the Company. All such warrants were issued in lieu of cash compensation and have five-year terms with exercise prices ranging from $1.09 to $5.00.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Security Ownership of Certain Beneficial Owners

The following table sets forth, as of
February 29, 2008, the name, address, stock ownership and voting power of each person or group of persons known by us who is not a director or a named executive officer of the Company to own beneficially more than 5% of the outstanding shares
of our common stock. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to shares beneficially owned.



63



---

##### Table of Contents

|                                                                                                        |  |                          |     |  |                                    |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | --- |  | ---------------------------------- | -
|Name And Address of Beneficial Owner                                                                    |  | Shares BeneficiallyOwned |     |  | Percent of CommonStock Outstanding |  
|Harry Ross 3622 Reeves Road, Ojai, CA 93023                                                             |  | 1,000,000                | (1) |  | 13.0                               | %
|Woodcliff Healthcare Investment Partners LLC 11150 Santa Monica Blvd., Ste. 1500, Los Angeles, CA 90025 |  | 5,974,458                | (2) |  | 50.05                              | %



|(1) | Information obtained from Form 13G/A dated December 31,
2007, filed by Mr. Ross on February 13, 2008.
|--- | -----------------------------------------------------------------------------------------------------

|(2) | Represents 1,739,130 common shares and 4,235,328 shares of
common stock reserved for issuance upon conversion of the Series A Preferred Stock that was issued on June 14, 2005. Woodcliff is a wholly-owned subsidiary of Hythiam, Inc. This information was obtained from Form 13D/A filed January 19,
2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Security Ownership of Management

The following table sets forth, as of February 29, 2008, information concerning the beneficial ownership of common stock by each director of the Company and the named executive officers listed in the Summary
Compensation Table included elsewhere herein, and all directors and executive officers as a group. According to rules adopted by the SEC, a person is the beneficial owner of securities if he or she has, or shares, the power to vote such
securities or to direct their investment. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to shares beneficially owned.



|                                                             |  |                          |  |                                   
|------------------------------------------------------------ |  | ------------------------ |  | ----------------------------------
|Name of Beneficial Owner                                     |  | Shares BeneficiallyOwned |  | Percent of Common StockOutstanding
|Robert J. Landis(1)                                          |  | 447,625                  |  | 5.6%                              
|Mary Jane Johnson(2)                                         |  | 390,000                  |  | 4.8%                              
|Paul Patti(3)                                                |  | 22,500                   |  | *                                 
|Steven E. Ramsland, Ed.D.(4)                                 |  | 10,000                   |  | *                                 
|Steven R. Peskin, M.D.(5)                                    |  | 12,500                   |  | *                                 
|Michel Sucher, M.D.(5)                                       |  | 12,500                   |  | *                                 
|Michael Yuhas(5)                                             |  | 12,500                   |  | *                                 
|Vijay A.Chevli(5)                                            |  | 12,500                   |  | *                                 
|Michael D. Bakst, Ph. D.(6)                                  |  | 12,500                   |  | *                                 
|John M. Hill(7)                                              |  | 0                        |  | *                                 
|All directors and executive officers as a group (10 persons) |  | 932,625                  |  | 11.0%                             



|* | Less than 1%.
|- | -------------

|(1) | Includes 107,000 shares of common stock held directly and 340,625 shares subject to options that are presently
exercisable or exercisable within 60 days of February 29, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 20,000 shares of common stock held directly and 370,000 shares subject to options that are presently
exercisable or exercisable within 60 days of February 29, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 22,500 shares subject to options that are presently exercisable.
|--- | -------------------------------------------------------------------------

|(4) | Includes 10,000 shares subject to options that are presently exercisable. Excludes 10,000 options that are not
exercisable within 60 days of February 29, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 12,500 shares subject to options that are presently exercisable. Excludes 12,500 options that are not
exercisable within 60 days of February 29, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 12,500 shares subject to options that are exercisable within 60 days of February 29, 2008. Excludes 12,500
options that are not exercisable within 60 days of February 29, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Excludes 100,000 shares subject to options that are not presently exercisable.
|--- | ------------------------------------------------------------------------------



64



---

##### Table of Contents

|ITEM13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|------- | -------------------------------------------------------------------------

Transactions with Related Persons

In August 2005, our principal operating subsidiary, CBC, entered into a marketing
agreement with Health Alliance Network, Inc. (HAN) whereby CBC appointed HAN as its primary representative and marketing agent for commercial business. Two shareholders of HAN were each members of Woodcliff, the owner of a controlling
interest in us. On January 12, 2007, the members of Woodcliff sold 100% of their outstanding membership interests in Woodcliff to Hythiam. For the years ended December 31, 2007 and 2006, CBC paid HAN $60,000 and $85,500, respectively,
under this agreement.

In February 2006, CBC entered into an agreement with Hythiam whereby we would have the exclusive right to market
Hythiams substance abuse disease management program to CBCs current and certain mutually agreed upon prospective clients. The program is an integrated disease management approach designed to offer less restrictive levels of care in order
to minimize repeat detoxifications. Under the agreement, we will pay Hythiam license and service fees for each enrollee who is treated. There were no transactions resulting from this agreement during the year ended December 31, 2007, the seven
months ended December 31, 2006, or the twelve months ended May 31, 2006.

During 2007, CBC contracted with Integra Health
Management, Inc. (IHM), a company that provides behavioral and medical health management and consultative services to healthcare payers. IHM was founded by one of our directors, Michael Yuhas, who also serves as its current Chief
Executive Officer. During the year ended December 31, 2007, CBC paid IHM $28,212 for monitoring and care coordination of intensive case management patients. In addition, Integra provided $15,000 of information technology consulting services to
CBC.

We have accelerated our Sarbanes-Oxley Act compliance efforts in order to meet management attestation requirements for financial
reporting internal controls as of December 31, 2007. Hythiam has paid for consulting services to accomplish our management review of such internal controls. Because this effort has benefited us, we will reimburse Hythiam a portion of the cost.
In addition we have benefited by being included under certain of Hythiams insurance policies. At December 31, 2007, $80,000 is included in accounts payable and accrued liabilities to cover expected reimbursements to Hythiam for these
costs.

During the year ended December 31, 2007, two executive officers served on our Board of Directors and also on the Board of
Directors for each of our wholly-owned subsidiary corporations.

Director Independence

Although we are not listed on the American Stock Exchange, we have used the definition of independent set forth in Section 121(A) of the
American Stock Exchange listing standards for the purpose of determining the independence of our directors and members of a committee of our Board of Directors. Such standards define an independent director, generally, as one who is not employed by
the Company, receives no compensation other than as a director, is not related to a Company officer, and is not an officer or owner of a business having transactions with us that exceed five percent of our gross revenues.

The following is a list of individuals that served as a director at any point during the twelve-month period covered by this report and that were
considered independent:

Michael D. Bakst, Ph.D.

Vijay Chevli

Eugene Froelich

Robert Parker

Steven R. Peskin, M.D.

David Schuster

Barry A. Stein, M.D.

Peter Jesse Walcott

Michel Sucher, M.D.

Michael Yuhas

There were no transactions, relationships, or arrangements considered by the Board of Directors in determining that a director is independent other than those described immediately above under the caption
Transactions with Related Persons.



65



---

##### Table of Contents

|ITEM14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|------- | --------------------------------------

Audit and Related Fees

The firm of Kirkland, Russ, Murphy & Tapp P.A. (KRMT) currently serves as our independent registered public
accounting firm to perform audits and prepare our income tax returns. The Audit Committee approved 100% of the services described below for audit, tax and related fees.

Audit Fees. The aggregate fees billed by KRMT for the audit of our annual consolidated financial statements and review of the financial statements included in the Companys quarterly reports on Form
10-Q for the year ended December 31, 2007 were $95,450. The aggregate fees billed by KRMT for professional services rendered in connection with the audit of our consolidated financial statements and review of the financial statements included
in the Companys quarterly reports on Form 10-Q during the seven month transition period ended December 31, 2006 were $80,450. The aggregate fees billed by KRMT for the audit of our annual consolidated financial statements and review of
the financial statements included in the Companys quarterly reports on Form 10-Q for the fiscal year ended May 31, 2006 was $68,950.

Audit-Related Fees. The aggregate fees billed by KRMT for assurance and related services related to the performance of the audit or review of the Companys consolidated financial statements and not described above under
Audit Fees were $20,500 for the year ended December 31, 2007, $14,700 for the seven months ended December 31, 2006, and $21,500 for the fiscal year ended May 31, 2006. Audit-related services principally include audits of
certain of our subsidiaries and our 401(k) plan.

Tax Fees. During the year ended December 31, 2007, KRMT billed $31,690 to the Company
for preparing the Companys tax returns for the tax year ended May 31, 2007. For the seven months ended December 31, 2006, KRMT billed $26,575 for preparing the Companys fiscal 2006 tax returns. During fiscal 2006, KRMT billed
$26,850 for preparing the Companys fiscal 2005 tax returns.

All Other Fees. The aggregate fees billed by KRMT for professional
services other than services described under Audit Fees, Audit-Related Fees and Tax Fees above were $1,650 for the year ended December 31, 2007, primarily for the furnishing of records to the independent
auditors of Hythiam. During the seven months ended December 31, 2006, such fees were $4,675 for assurance services related to a bond indenture. During fiscal 2006, KRMT billed $4,000 for agreed upon procedures relating to a private placement
transaction.

The Audit Committee does not believe the provision of non-audit services by the independent accountant impairs the ability of such accountant
to maintain independence with regard to the Company.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors

The Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by the
Companys independent auditors in order to assure that the provision of such services does not impair the auditors independence. These services may include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Management is required to periodically report to the Audit
Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. During the year ended December 31, 2007, all services were pre-approved by
the Audit Committee in accordance with this policy.



66



---

##### Table of Contents

PART IV



|ITEM15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|------- | ------------------------------------------



|    |  |    |  |                                                                                                                                                                                 
|--- |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 1. |  | Consolidated Financial Statements - Included in Part II of this report:                                                                                                         
|    |  |    |  | Report of Independent Registered Public Accounting Firm                                                                                                                         
|    |  |    |  | Consolidated Balance Sheets, December 31, 2007 and 2006                                                                                                                         
|    |  |    |  | Consolidated Statements of Operations for the year ended December 31, 2007, the seven months ended December 31, 2006 and fiscal
years ended May 31, 2006 and 2005               
|    |  |    |  | Consolidated Statements of Stockholders Deficit for the year ended December 31, 2007, the seven months ended December 31, 2006
and the fiscal years ended May 31, 2006 and 2005
|    |  |    |  | Consolidated Statements of Cash Flows for the year ended December 31, 2007, the seven months ended December 31, 2006, and the fiscal
years ended May 31, 2006 and 2005          
|    |  |    |  | Notes to Consolidated Financial Statements                                                                                                                                      
|    |  |   
|    |  | 2. |  | Consolidated Financial Statement Schedules: None.                                                                                                                               
|    |  |   
|    |  |    |  | Other schedules are omitted, as required information is inapplicable or the information is presented in the consolidated financial statements or related notes.                 
|    |  |   
|    |  | 3. |  | Exhibits:                                                                                                                                                                       



|               |  |                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description and Reference                                                                                                                             
|3.1            |  | Restated Certificate of Incorporation as amended on November 3, 2005 and March 23, 2006.(15)                                                          
|               | 
|3.2            |  | Amended and Restated Bylaws, as amended July 20, 2000.(7)                                                                                             
|               | 
|3.3            |  | Bylaw amendment.(5)                                                                                                                                   
|               | 
|3.4            |  | Bylaw amendment, effective October 28, 2005.(14)                                                                                                      
|               | 
|3.5            |  | Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock of Comprehensive Care Corporation.(5)                     
|               | 
|4.1            |  | Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to Convertible Subordinated Debentures.(1)                    
|               | 
|4.2            |  | Form of Common Stock Certificate.(11)                                                                                                                 
|               | 
|10.1           |  | Form of Stock Option Agreement. *(2)                                                                                                                  
|               | 
|10.2           |  | Form of Indemnity Agreement as amended March 24, 1994. *(3)                                                                                           
|               | 
|10.3           |  | Comprehensive Care Corporation 1995 Incentive Plan, as amended on November 17, 1998.(8)                                                               
|               | 
|10.4           |  | Amended and Restated Non-Employee Directors Stock Option Plan. *(4)                                                                                  
|               | 
|10.5           |  | Amendment No. 1 to Comprehensive Care Corporation Amended and Restated Non-Employee Directors Stock Option Plan, effective as of March 23, 2006.*(15)
|               | 
|10.6           |  | Employment Agreement as amended February 7, 2003 between the Company and Robert J. Landis. *(6)                                                       
|               | 
|10.7           |  | Employment Agreement amendment dated June 14, 2005 between the Company and Robert J. Landis. *(5)                                                     
|               | 
|10.8           |  | Employment Agreement waiver dated June 14, 2005 between the Company and Robert J. Landis. *(5)                                                        
|               | 
|10.9           |  | Employment Agreement as amended February 7, 2003 between the Company and Mary Jane Johnson. *(6)                                                      
|               | 
|10.10          |  | Employment Agreement amendment dated June 14, 2005 between the Company and Mary Jane Johnson. *(5)                                                    
|               | 
|10.11          |  | Employment Agreement waiver dated June 14, 2005 between the Company and Mary Jane Johnson.*(5)                                                        
|               | 
|10.12          |  | Employment Agreement dated June 3, 2002 between the Company and Thomas C. Clay. *(9)                                                                  
|               | 
|10.13          |  | Comprehensive Care Corporation 2002 Incentive Plan as amended. *(10)                                                                                  
|               | 
|10.14          |  | Stock Purchase Agreement dated June 14, 2005 between the Company and Woodcliff Healthcare Investment Partners LLC.(5)                                 
|               | 
|10.15          |  | Registration Rights Agreement dated June 14, 2005 between the Company and Woodcliff Healthcare Investment Partners LLC.(5)                            
|               | 
|10.16          |  | Marketing Agreement by and between the Company and Health Alliance Network, Inc.(12)                                                                  



67



---

##### Table of Contents

|      |  |                                                                                                                                                                            
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.17 |  | Sublease Agreement dated May 22, 2006 between Comprehensive Behavioral Care, Inc. and AT&T Corporation(13)                                                                 
|      | 
|14.1  |  | Code of Business Conduct and Ethics (Revised) (filed herewith).                                                                                                            
|      | 
|21.1  |  | List of the Companys active subsidiaries (filed herewith).                                                                                                                
|      | 
|23.1  |  | Consent of Kirkland, Russ, Murphy & Tapp P.A. (filed herewith).                                                                                                            
|      | 
|31.1  |  | Comprehensive Care Corporation CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                               
|      | 
|31.2  |  | Comprehensive Care Corporation CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                               
|      | 
|32.1  |  | Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|      | 
|32.2  |  | Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).



|* | Management contract or compensatory plan or arrangement with one or more directors or executive officers.
|- | ---------------------------------------------------------------------------------------------------------

|(1) | Filed as an exhibit to the Companys Form S-3 Registration Statement No. 2-97160.
|--- | ---------------------------------------------------------------------------------

|(2) | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 1988.
|--- | --------------------------------------------------------------------------------------

|(3) | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 1994.
|--- | --------------------------------------------------------------------------------------

|(4) | Filed as an exhibit to the Companys Form 8-K dated November 9, 1995.
|--- | ---------------------------------------------------------------------

|(5) | Filed as an exhibit to the Companys Form 8-K dated June 14, 2005.
|--- | ------------------------------------------------------------------

|(6) | Filed as an exhibit to the Companys Form 8-K dated February 7, 2003.
|--- | ---------------------------------------------------------------------

|(7) | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 2000.
|--- | --------------------------------------------------------------------------------------

|(8) | Filed as an exhibit to the Companys Form 8-K dated November 25, 1998.
|--- | ----------------------------------------------------------------------

|(9) | Filed as an exhibit to the Companys Form 8-K dated June 7, 2002.
|--- | -----------------------------------------------------------------

|(10) | Filed as Appendix A to the Companys definitive proxy statement on Schedule 14A filed on January 28, 2005.
|---- | ----------------------------------------------------------------------------------------------------------

|(11) | Filed as an exhibit to Form S-8 (File No. 333-108561) filed on September 5, 2003.
|---- | ---------------------------------------------------------------------------------

|(12) | Filed as an exhibit to the Companys Form 8-K, dated August 3, 2005.
|---- | --------------------------------------------------------------------

|(13) | Filed as an exhibit to the Companys Form 8-K, dated May 26, 2006.
|---- | ------------------------------------------------------------------

|(14) | Filed as an exhibit to the Companys Form 8-K, dated November 3, 2005.
|---- | ----------------------------------------------------------------------

|(15) | Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 2006.
|---- | --------------------------------------------------------------------------------------



68



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, March 17, 2008.



COMPREHENSIVE CARE CORPORATIONBy

/s/ JOHN M. HILLJohn M. HillPresident and Chief Executive Officer (Principal Executive Officer)By

/s/ ROBERT J. LANDISRobert J. LandisChief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the capacities and on the dates so indicated.



|                     |  |                                                                                                                         |  |               
|-------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --------------
|SIGNATURE            |  | TITLE                                                                                                                   |  | DATE          
|                     |  |                                                                                                                        
|/s/ JOHN M. HILL     |  | President, Chief Executive Officer, and Director (Principal Executive Officer)                                          |  | March 17, 2008
|John M. Hill         |  |                                                                                                                         |  |               
|/s/ ROBERT J. LANDIS |  | Chairman of the Board of Directors, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |  | March 17, 2008
|Robert J. Landis     |  |                                                                                                                         |  |               
|                     |  |                                                                                                                        
|/s/ MICHAEL D. BAKST |  | Director                                                                                                                |  | March 17, 2008
|Michael D. Bakst     |  |                                                                                                                         |  |               
|                     |  |                                                                                                                        
|/s/ VIJAY A. CHEVLI  |  | Director                                                                                                                |  | March 17, 2008
|Vijay A. Chevli      |  |                                                                                                                         |  |               
|                     |  |                                                                                                                        
|/s/ STEVEN R.PESKIN  |  | Director                                                                                                                |  | March 17, 2008
|Steven R. Peskin     |  |                                                                                                                         |  |               
|                     |  |                                                                                                                        
|/s/ MICHEL A. SUCHER |  | Director                                                                                                                |  | March 17, 2008
|Michel A. Sucher     |  |                                                                                                                         |  |               
|                     |  |                                                                                                                        
|/s/ MICHAEL YUHAS    |  | Director                                                                                                                |  | March 17, 2008
|Michael Yuhas        |  |                                                                                                                         |  |               



69